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TABLE OF CONTENTS
INDEX TO FINANCIAL STATEMENTS
As filed with the Securities and Exchange Commission on MarchOctober 1, 20132020.
Registration No. 333-175389333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 5
TO
FORM S-1
REGISTRATION STATEMENT
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
GATOS SILVER, INC.†
(Exact Name of Registrant as Specified in Its Charter)
Delaware | ||||
(State or Other Jurisdiction of Incorporation or Organization) | 1040 (Primary Standard Industrial Classification Code Number) | 27-2654848 (I.R.S. Employer Identification Number) |
370 17th1660 Lincoln Street
Suite 3800
2750
Denver, CO 80202
80264
(303) 784-5350
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant’sRegistrant's Principal Executive Offices)
Executive Chairman and Stephen Orr
Chief Executive Officer
and Director
Sunshine Silver MinesMining & Refining Corporation
370 17th
1660 Lincoln Street, Suite 3800
2750
Denver, CO 80202
80264
(303) 784-5350
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)
Copies to: | ||||
Richard D. Truesdell, Jr.
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10001 | |||
Approximate date of commencement of proposed sale to the public: public:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this formForm are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ¨o
If this formForm is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨o
If this formForm is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨o
If this formForm is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large"large accelerated filer,” “accelerated filer”" "accelerated filer," "smaller reporting company," and “smaller reporting company”"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 ý |
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 7(a)(2)(B) of the Securities Act. ý
CALCULATION OF REGISTRATION FEE
| Title of Each Class of Securities To Be Registered | Proposed Maximum Aggregate Offering Price(1)(2) | Amount of Registration Fee | ||
|---|---|---|---|---|
Common Stock, par value $0.001 per share | $100,000,000 | $10,910 | ||
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The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
The information contained in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we areit is not soliciting offersan offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED MARCHOCTOBER 1, 20132020
PRELIMINARY PROSPECTUS
SHARES
SUNSHINE
GATOS SILVER, MINES CORPORATIONINC.
COMMON STOCK
We are selling shares of common stock to the underwriters in a firm commitment offering.
Prior to this offering, there has been no public market for our common stock. We currently estimate that the initial public offering price will be between $ and $ per share. We intend to applyhave applied to list our common stock on the New York Stock Exchange under the symbol “SSMC.” We have applied to list our common stock on("NYSE") and the Toronto Stock Exchange ("TSX") under the symbol “SM.”"GATO."
The underwriters have an option to purchase a maximum of additional shares of common stock from us to cover over-allotments. The underwriters can exercise this rightoption at any time within 30 days from the date of this prospectus.
We are an “emerging"emerging growth company”company" as defined in the Jumpstart Our Business Startups Act of 2012 or the JOBS Act,(the "JOBS Act") and will therefore be subject to reduced reporting requirements.
Investing in our common stock involves risks. See “Risk Factors”"Risk Factors" beginning on page 1628 of this prospectus.
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| Per Share | Total | |||||||
|---|---|---|---|---|---|---|---|---|
| $ | $ | ||||||
Underwriting discounts and commissions(1) | $ | $ | ||||||
Proceeds, before expenses, to | $ | $ | ||||||
Delivery of the shares of common stock will be made on or about , 2013.2020 through the book-entry facilities of The Depositary Trust Company.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
| BMO Capital Markets | RBC Capital Markets |
The date of this prospectus is , 2013.2020.
SUNSHINE SILVER MINES CORPORATION PRINCIPAL PROJECTS
Sunshine Mine PropertyTable of Contents
Silver Valley
Idaho, U.S.A.
Chihuahua, Mexico
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GLOSSARY OF TECHNICAL TERMS | 175 | ||||||||
INDEX TO FINANCIAL STATEMENTS | F-1 | ||||||||
In this prospectus, “Sunshine Silver,” the “Company,” “we,” “us” and “our” refer to Sunshine Silver Mines Corporation and its subsidiaries. We and the underwriters have not authorized anyone to provide any information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We and the underwriters take no responsibility for, and can provide no assurance and make no representation as to the reliability of, any other information that others may give you. We are offering to sell and are seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of theour common stock.
Immediately prior to the closing of this offering, we intend to effect a reorganization (the "Reorganization") in which (i) Silver Opportunity Partners LLC ("SOP") will convert into a Delaware corporation named Silver Opportunity Partners Corporation ("SOP Corporation"), (ii) each shares of our common stock outstanding immediately prior to the Reorganization will be reclassified into (A) shares of our common stock and (B) shares of common stock of SOP
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Corporation and (iii) we will change our name from Sunshine Silver Mining & Refining Corporation to Gatos Silver, Inc. SOP currently holds our interest in the Sunshine Complex, which is located in the Coeur d'Alene Mining District in Idaho and is comprised of the Sunshine Mine and the Sunshine Big Creek Refinery. Through the Reorganization, we expect to distribute all of our equity interest in SOP to our shareholders immediately prior to the completion of this offering. See "Prospectus Summary—Corporate Information and Reorganization." As used in this prospectus, SOP refers to (i) SOP prior to the Reorganization and (ii) SOP Corporation from and after the Reorganization. Unless otherwise indicated, all information in this prospectus assumes the completion of the Reorganization.
Where information relates to our company before the Reorganization and where the context otherwise requires, the "Company," "SSMRC," "we," "us" and "our" refer to Sunshine Silver Mining & Refining Corporation and its consolidated subsidiaries, and, unless the context otherwise requires, to its affiliate entities, Minera Plata Real S. de R.L. de C.V. ("MPR"), Operaciones San Jose de Plata S. de R.L. de C.V. ("OSJ") and Servicios San Jose de Plata S. de R.L. de C.V. ("SSJ"). We also refer to these entities collectively as the "Los Gatos Joint Venture" or "LGJV" where applicable. Where information relates to our company following the Reorganization and where the context otherwise requires, "Gatos," the "Company," "we," "us" and "our" refer to Gatos Silver, Inc. and its consolidated subsidiaries, and, unless the context otherwise requires, to its affiliate entities that are part of the Los Gatos Joint Venture. We own approximately 51.5% of the LGJV. Despite owning the majority interest in the LGJV, we do not exercise control over the LGJV due to certain provisions contained in the Unanimous Omnibus Partner Agreement (as defined herein) that currently require unanimous partner approval of all major operating decisions (such as certain approvals, the creation of security interests on property, any initial public offering of the joint venture, and litigation settlements). We intend to exercise our right to repurchase an 18.5% interest in the LGJV from Dowa, increasing our ownership to approximately 70.0%. Following this increase in our ownership interest in the LGJV, we will continue to not exercise control over the LGJV due to the provisions contained in the Unanimous Omnibus Partner Agreement that currently require unanimous partner approval of all major operating decisions. See "Business—The Los Gatos District—Unanimous Omnibus Partner Agreement."
MARKET AND INDUSTRY DATA AND FORECASTS
This prospectus includes market and industry data and forecasts that we have developed from independent research reports, publicly available information, various industry publications, other published industry sources or our internal data and estimates. Independent research reports, industry publications and other published industry sources generally indicate that the information contained therein was obtained from sources believed to be reliable, but do not guarantee the accuracy and completeness of such information. Although we believe that the publications and reports are reliable, neither we nor the underwriters have independently verified the data. Our internal data, estimates and forecasts are based on information obtained from trade and business organizations and other contacts in the markets in which we operate and our management’smanagement's understanding of industry conditions. Although we believe that such information is reliable, we have not had such information verified by any independent sources.
NOTICE REGARDING MINERAL DISCLOSURE
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CONCURRENT CANADIAN PROSPECTUS OFFERING
On December 21, 2011, we filed a prospectus withIn October 2018, the securities regulatory authorities in each province of Canada other than the Province of Québec in connection with our initial public offering in Canada and our application to list our shares of common stock on the Toronto Stock Exchange. As part of the filing process, we were required to prepare and file with Canadian securities regulators a technical report on each of our material properties prepared in accordance with National Instrument 43-101, or NI 43-101, which is an instrument developed by the Canadian Securities Administrators and administered by the provincial securities commissions that governs how issuers in Canada disclose scientific and technical information about their mineral projects to the public. United States reporting requirements for disclosure of mineral properties are governed by Industry Guide 7 promulgated by the U.S. Securities and Exchange Commission or(the "SEC") adopted amendments to its current disclosure rules to modernize the SEC. NI 43-101 andmineral property disclosure requirements for mining registrants. The amendments include the adoption of a new subpart 1300 of Regulation S-K, which will govern disclosure for mining registrants (the "SEC Mining Modernization Rules"). The SEC Mining Modernization Rules replace the historical property disclosure requirements for mining registrants that were included in the SEC's Industry Guide 7 standards are substantially different. This prospectusand better align disclosure with international industry and
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regulatory practices, including the Canadian National Instrument 43-101—Standards of Disclosure for Mineral Projects ("NI 43-101"). Although compliance with the SEC Mining Modernization Rules is not required until January 1, 2021, we have chosen to voluntarily comply with the SEC Mining Modernization Rules in this prospectus.
The technical report summary for our material properties, the Los Gatos District and the Cerro Los Gatos Mine, has been prepared in accordance with Industry Guide 7the SEC Mining Modernization Rules and not NI 43-101. The NI 43-101 technical reports includeand is included as Exhibit 96.1 to the terms “mineral resource,” “measuredregistration statement of which this prospectus forms a part.
"Inferred mineral resources" are subject to uncertainty as to their existence and as to their economic and legal feasibility. The level of geological uncertainty associated with an inferred mineral resource” “indicated mineral resource,” is too high to apply relevant technical and “inferred mineral resource,” which are not terms recognized byeconomic factors likely to influence the prospects of economic extraction in a manner useful for evaluation of economic viability. Because we have elected to voluntarily comply with the SEC for purposes ofMining Modernization Rules, the mineral property disclosure regarding mineral properties and, pursuant to the requirements of Industry Guide 7,included in this prospectus may not be used in reports or registration statements filed withcomparable to similar information provided by other issuers that have not elected to early adopt such rules. For the SEC. Persons in the United States considering an investment in our common stock are cautioned not to place any reliance on the information regarding our mineral resource and preliminary economic assessment presented in ourmeanings of certain technical reports filed in Canada or the prospectus filed with Canadian securities regulatory authorities and should rely solely on the information presentedterms used in this prospectus, for purposessee "Glossary of evaluating an investment in us.
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This summary highlights the more detailed information and financial data and statements contained elsewhere in this prospectus. This summary maydoes not contain all of the information that you should consider before deciding to invest in our common stock. You should read this entire prospectus carefully, including the “Risk Factors”"Risk Factors" section and theour consolidated financial statements and therelated notes to those statements. included elsewhere in this prospectus.
As used herein, references to the Sunshine Mine"Los Gatos Technical Report and Preliminary Economic AssessmentReport" are to the “NI"NI 43-101 Technical Report: Mineral Resource and Preliminary Economic Assessment of the Sunshine Silver MineLos Gatos Project,” Chihuahua, Mexico," prepared by Tetra TechMM,Tech Inc. ("Tetra Tech"), or Tetra Tech, and MTB Project Management Professionals, Inc., or MTB, with an effective date of December 21, 2012,dated July 1, 2020, which was prepared in accordance with the requirements of the SEC Mining Modernization Rules and NI 43-101. Tetra Tech also prepared a mineralized material statement on the Sunshine Mine property, which was prepared in accordance with the requirements of Industry Guide 7. When referenceThe Los Gatos Technical Report is madefiled as Exhibit 96.1 to the Sunshine Mine Technical Report and Preliminary Economic Assessment,registration statement of which this includes the mineralized material statement. References toprospectus forms a part. The mineral resource estimates contained in the Los Gatos Technical Report are to the “NI 43-101 Technical Report: Mineral Resources of the Los Gatos Project, Chihuahua, Mexico,” prepared by Tetra Tech, withhave an effective date of December 21, 2012, which was preparedSeptember 6, 2019 and have not been updated since that time. The mineral reserve estimates and the economic analysis contained in accordance with the requirements of NI 43-101. Tetra Tech also prepared a mineralized material statement on the Los Gatos Project, which was prepared in accordance with the requirements of Industry Guide 7. When reference is made to the Los Gatos Technical Report this includes the mineralizedhave an effective date of July 1, 2020 and have not been updated since that time and exclude 655,746 tonnes of material statement. that has been mined through June 30, 2020. See "Business—The Los Gatos District."
As used herein, references to “$”"$" or “dollars”"dollars" are to United States dollars.
SUNSHINE SILVER MINES CORPORATIONAll mineral reserves and mineral resources contained herein for the Cerro Los Gatos Mine, the Esther deposit and the Amapola deposit are presented on both a 100% basis as well as on a 51.5% basis to reflect our current ownership interest in the LGJV.
Sunshine Silver Mines Corporation is We are a U.S.-based precious metals explorationproduction, development and developmentexploration company with the objective of becoming a premier silver producer. The Company isWe are currently focused on the advancementproduction and continued development of its two principal projects:the Cerro Los Gatos Mine and the further exploration and development of the Los Gatos District:
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In total, as of the date of this prospectus, the Company owns or controls a portfolio of 23 exploration properties in the United States and Mexico covering an area of approximately 576,336 hectares.
Principal Projects
Sunshine Mine
The Sunshine Mine, acquired by the Company in the first half of 2010, is located within the mining-friendly Coeur d’Alene Mining District in Idaho. As a past-producing mine, the Sunshine Mine is estimated to have produced over 365 million ounces of silver from 1904 to 2008. In 1990, the last year the Sunshine Mine operated at full capacity, silver production from the Sunshine Mine was approximately 5.4 million ounces. In 2008, Sterling Mining Company, or Sterling, the prior owner of the Sunshine Mine, ceased production and in early 2009 went into bankruptcy due to, we believe, among other factors, falling silver prices and inadequate capital.
The Sunshine Mine has significant existing on-site infrastructure, including an operational primary shaft, which is being modernized and upgraded, and a secondary shaft, which is being refurbished. The Company’s consolidated land position at the Sunshine Mine property currently consists of approximately 3,901 hectares. The property has an abundant water supply, is connected to the electricity grid and is accessible by paved roads. The Company has all environmental permits in place to begin surface and sub-surface operations on the property. Construction permits will be applied for as needed as the Company begins construction activities.
The underground workings at the Sunshine Mine consist of multiple levels developed off the primary shaft, extending from the surface to a depth of over 1,825 meters.
Though a significant historical producing mine, the Company believes that the Sunshine Mine property remains highly prospective. As a result, the Company is undertaking significant exploration and re-development of the property. Based on ongoing exploration activities which began in 2011, the Company has discovered the new “10” vein and extensions of the Sunshine Vein and the Yankee Boy Split Vein. The Company continues to drill in key target areas.
An independent technical report, prepared by Tetra Tech, estimated 2,880,312 tonnes of mineralized material at an average silver grade of 781.7 grams/Tonne (inclusive of expected mining dilution) at the Sunshine Mine property.
Sunshine Silver’s objectives at the Sunshine Mine property are to:
continue to define additional mineralized material through expanded surface and underground exploration;
complete the upgrading of the Jewell shaft;
upgrade the Silver Summit shaft to provide a secondary access to certain underground levels;
complete a feasibility study if Sunshine Silver deems it necessary or appropriate to do so;
develop sufficient stope access to return the mine to production;
commence mining in the upper portions of the mine;
complete the construction of a new modern ore processing facility that will produce silver-bearing concentrates; and
upgrade other existing infrastructure and re-establish access to developed portions of the resource.
The Sunshine Mine property will require significant time and capital investment before the property returns to production. The Company anticipates that it will continue to incur operating costs without realizing any revenues at the Sunshine Mine until at least late 2014. See “Business—The Sunshine Mine Property” beginning on page 70.
Los Gatos Project
The Los Gatos Project is located approximately 120 kilometers south of the state capital of Chihuahua City in Northern Mexico and to date,is comprised of a 103,087-hectare land position, constituting a new mining district. The Los Gatos District consists of 14 mineralized zones, which include three identified silver discoveries, silver-lead-zinc deposits that contain mineral resources—the Cerro Los Gatos zone,Mine, the Esther zonedeposit and the Amapola zone,deposit—as well as 11 additional high-priority targets defined by high-grade drill intersections and 10 other priority targets with over 100150 kilometers of outcropping quartz and
calcite veins. The area is characterized by a predominant silver-lead-zinc epithermal mineralization. On September 1, 2019, the LGJV commenced production at the Cerro Los Gatos Mine. A core component of the LGJV's business plan is to explore the highly prospective, underexplored Los Gatos District with the objective of identifying additional mineral deposits that can be mined and processed, possibly utilizing the Cerro Los Gatos Mine plant infrastructure.
Prior to Sunshine Silver’sour initial acquisition of exploration concession rights in April 2006, only very limited historical prospecting and exploration activities had been conducted atin the Los Gatos Project. The Company wasDistrict. We were able to acquire concessions covering approximately 149,083103,087 hectares and, through itsour exploration, has discovered a virgin silver region containing high-grade epithermal vein stylevein-style mineralization throughout itsthe Los Gatos District concession package.
In 2008, the Companywe negotiated surface access rights with local ranch owners and obtained the necessary environmental permits for drilling.drilling and road construction. Through 2015, we purchased all the surface lands required for the Cerro Los Gatos Mine development. Environmental baseline data collection began in May 2010 and was completed in 2016 and approved in 2017 to prepare for the development of future environmental studies required for the Cerro Los Gatos Project. Mine. In 2014, we partnered with Dowa Metals and Mining Co., Ltd. ("Dowa"), which manufactures and distributes metals products and owns Japan's largest zinc refinery, to finance and develop the Cerro Los Gatos Mine and to pursue exploration in the Los Gatos District. We and Dowa formed a Mexico-incorporated co-owned operating company, MPR, which owns certain surface and mineral rights associated with the Los Gatos District. In connection with the formation of the LGJV, we entered into the Unanimous Omnibus Partner Agreement with Dowa, MPR, OSJ, SSJ and Los Gatos Luxembourg S.a.r.l. on January 1, 2015 (as amended on April 10, 2017, June 30, 2017, March 10, 2018, May 20, 2019, April 29, 2020, May 25, 2020 and June 16, 2020, the "Unanimous Omnibus Partner Agreement"), which governs our and Dowa's respective rights over the LGJV. We own approximately 51.5% of the LGJV, with Dowa owning the remainder. Despite owning the majority interest in the LGJV, we do 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 (such as certain approvals, the creation of security interests on property, any initial public offering of the joint venture, and litigation settlements). We intend to exercise our right to repurchase an 18.5% interest in the LGJV from Dowa, increasing our ownership to approximately 70.0%. Following this increase in our ownership interest in the LGJV, we will continue to not exercise control over the LGJV due to the provisions contained in the Unanimous Omnibus Partner Agreement that currently require unanimous partner approval of all major operating decisions. See "Business—The present field camp is located in a community of approximately 200 persons, with electrical and water services, an elementary school and basic health services. The Company believesLos Gatos District—Unanimous Omnibus Partner Agreement."
We believe that it haswe have strong support from the local community.community, with over 130 employees from the local community working across multiple areas involving the continued underground development,
To date, Sunshine Silver’s
construction of the surface facilities and operation of the Cerro Los Gatos Mine. Over 99% of the approximate 540 employees at the Cerro Los Gatos Mine hail from Mexico, highlighting our commitment to the local workforce.
Our primary areas of focus have been definingconstructing and extending mineralization alongcommissioning the Cerro Los Gatos Mine and defining and expanding the mineral resources associated with the Cerro Los Gatos Mine, the Esther deposit and the Amapola zones.deposit. As of August 2012, Sunshine Silver had completed 345July 1, 2020, 739 exploration drill holes have been completed in the Los Gatos Project,District, totaling 160,445259,060 meters. The Los Gatos Project has a known strike length of quartz veining over 100 kilometers. In addition to the Cerro Los Gatos, Esther and Amapola zones, the Los Gatos Project has 10 other priority targets. An independent technical report prepared by Tetra Tech in December 2012 estimatedTechnical Report estimates that the Cerro Los Gatos depositMine contains 5,270,00010.4 million tonnes of mineralized materialmeasured and indicated resources (or 5.4 million tonnes of measured and indicated resources on a 51.5% basis) inclusive of mineral reserves, at average grades of 269 g/t silver, 2.7% lead, 5.5% zinc, 0.34 g/t gold and 0.11% copper, or 3.5 million tonnes of measured and indicated resources (or 1.8 million tonnes of measured and indicated resources on a 51.5% basis) exclusive of mineral reserves, at average grades of 154 g/t silver, 2.2% lead, 4.3% zinc and 0.29 g/t gold, and 3.7 million tonnes of inferred resources (or 1.9 million tonnes of inferred resources on a 51.5% basis), at average grades of 107 g/t silver, 2.8% lead, 4.0% zinc and 0.28 g/t gold. The mineral resource estimates for the Cerro Los Gatos Mine have an average gradeeffective date of 179 grams/Tonne silver, 2.0% leadSeptember 6, 2019 and 4.2% zinc;have not been updated since that time. The mineral resource estimates contained in the Los Gatos Technical Report are presented on an undiluted basis without adjustment for metallurgical recovery.
The Los Gatos Technical Report estimates that the Esther deposit contains 620,0000.46 million tonnes of mineralized materialindicated resources (or 0.24 million tonnes of indicated resources on a 51.5% basis) at an average gradegrades of 113 grams/Tonne133 g/t silver, 0.6%0.04 g/t gold, 0.02% copper, 0.70% lead and 1.7%2.10% zinc, and 2.29 million tonnes of inferred resources (or 1.18 million tonnes of inferred resources on a 51.5% basis) at average grades of 98 g/t silver, 0.12 g/t gold, 0.05% copper, 1.60% lead and 3.00% zinc; and the Amapola deposit contains 480,0000.25 million tonnes of mineralized materialindicated resources (or 0.13 million tonnes of indicated resources on a 51.5% basis) at an average gradegrades of 101 grams/Tonne135 g/t silver, 0.1%0.10 g/t gold, 0.02% copper, 0.10% lead and 0.2%0.30% zinc, and 3.44 million tonnes of inferred resources (or 1.77 million tonnes of inferred resources on a 51.5% basis) at average grades of 140 g/t silver, 0.10 g/t gold, 0.03% copper, 0.20% lead and 0.30% zinc. The mineralized materialmineral resource estimates for the Esther and Amapola deposits have an effective date of December 21, 2012 and have not been updated since that time. The mineral resource estimates contained in the Los Gatos ProjectTechnical Report are presented on an undiluted in-situ.basis without adjustment for metallurgical recovery.
Since the acquisition of the Los Gatos District concession package, we, Dowa and the LGJV have invested approximately $500 million in the development of the Cerro Los Gatos Mine. The Company’sCerro Los Gatos Mine is currently in production. The first lead concentrate was shipped on September 3, 2019, and the first zinc concentrate was shipped on September 4, 2019. We anticipate increasing production to the designed 2,500 tpd rate by the end of the first quarter of 2021.
Our objectives at the Cerro Los Gatos Mine are to, among other things:
Our objectives at the Los Gatos ProjectDistrict are to:to, among other things:
Esther and Amapola deposits;
perform additional in-filldeposits;
The Los Gatos Project will require significant time and capital before the Project is brought into production. The Company anticipates that it will continue to incur operating costs without realizing any revenues at the Los Gatos Project for the foreseeable future. See “Business—The Los Gatos Project” beginning on page 78."Business—Our Company—Our Principal Projects."
Overview
Silver occursdeposits occur naturally in itstheir solid metallic state and isare commonly associated with deposits of gold, copper, lead and zinc. According to GFMS Limited, or GFMS, 2011 global supplyzinc as a secondary metal. Silver is a precious metal and demand totaled approximately 1.0 billion ouncesis widely used in the manufacturing of silver; approximately 73.2% of 2011 global supply camejewelry and silverware and as an investment. Silver is distinct from mine production.
Silver has strong supplyother precious metals in that it is both used in industrial applications and demand fundamentals with significant demand rooted in diverse sectors. The demand for silver is driven primarily by three uses: industrial, consumer and investment. According to GFMS, in 2011, industrial, consumer andas an investment represented 46.8%, 37.5% and 15.8% of silver demand, respectively.asset.
Industrial—Silver has a number of distinctive physical and chemical properties that make it an essential component in numerous industrial applications, including its strength, malleability, conductivity and ductility, its sensitivity to and high reflectance of light and its ability to endure extreme temperature ranges. These properties restrict its substitution in most applications, which include batteries, bearings and catalysts. GFMS data indicates that silver demand for industrial applications grew from 349.7 million ounces in 2001 to 486.5 million ounces in 2011, a 37.8% increase.
applications. Silver is one of the world's best conductorconductors of electricity among all metals and is used in virtually all electronics (includingelectronic components of common items such as solar panel photovoltaic cells, computers, televisions and cell phones). The most rapid growth in this sector is set to come from emerging markets, such as India and China, where rapid advances in living standards mean electronic goods have become increasingly affordable and desirable. In 2000, China accounted for just 8% of global industrial silver demand, against a 2011 contribution of 18%.phones.
Increases in emerging applications for silver (such as LCD technology and RFID technologies) are expected to continue to augment industrial demand. Emerging applications include utilizing silver’s reflectivity Silver has also been used as a component in solar cells to produce “green” electricity, and utilizing silver’s antimicrobial properties in medical applications and in the preventionmedium of algae build-up in water purification systems. GFMS projects that global industrial demand for silver will increase to a new record high of 511.6 million ounces in 2014.
Consumer—Consumer use ofexchange since earliest recorded history. While it is no longer widely used as circulating currency, silver is primarilystill widely sought by investors for the fabricationits store of jewelry, silverware and coins, which rely on silver’s lustre, resistance to tarnishing and malleability. For these usesvalue attributes. In particular, silver is often alloyed to a small proportion of other metals, such as copper, to harden it. Sterling silver, for example, is 92.5% silver and 7.5% copper and has been the standard in many countries for silver jewelry since the 14th century. There has been a sharp uptick in Chinese consumer demand for silver, as GFMS data indicates that Chinese silverware fabrication rose by 10% in 2011 and Chinese jewelry demand continued to grow.
Investment—Investment demand for silver has increased significantly in the last 10 years, with the most significant investment demand coming from silver exchange traded funds, or ETFs, and bullion funds. Historically, the price of silver has shown at times a high correlation to the price of gold as a result of investment demand, and has been at times viewed as an attractive hedge against a decrease in the value of currency and inflation during times of economic uncertainty.
Demand
The three principal drivers of silver demand are industrial applications, consumer use and investment. According to The Silver Institute's World Silver Survey 2020, demand for industrial applications is mainly driven by electrical and electronics uses, which accounted for 58.3% of industrial demand and 30.0% of total demand in 2019. Jewelry accounted for 20.3% of total demand and net physical investment represented 18.8% of total demand.
Silver demand grew 0.4% in 2019 to a three-year high of 991.8 million ounces, from 988.3 million ounces the previous year, driven by a 12.3% surge in demand for net physical investment. This was offset by declines in silverware and other industrials. Silver remains difficult to substitute in many areas, and outside of a dip in 2009, demand for industrial applications has remained broadly flat since 2007. There was healthy photovoltaic demand in 2019, with support from structural changes in demand, such as vehicle electrification.
World Physical Silver Demand in 2019 (%)
Source: The Silver Institute, World Silver Survey 2020
Supply
Silver supply is primarily driven by mined silver production, which, according to The Silver Institute's World Silver Survey 2020, accounted for 81.7% of supply in 2019. Recycling largely accounted for the remainder of silver supply. Global silver supply increased 0.6% year-over-year in 2019 to 1,023 million ounces compared to 1,016.8 million ounces in 2018.
Mine silver output in 2019 declined for the fourth consecutive year, falling 1.3% to 836.5 million ounces from 847.8 million ounces in 2018. These recent production declines follow 13 consecutive years of growth. The decrease in silver supply was largely driven by lower grades at primary silver mines, lower silver production from copper mines and losses from production disruptions. In Peru, Compañía de Minas Buenaventura's Uchucchacua Mine saw silver production decrease from a 27% decline in grades and experienced a 21-day strike; Hochschild Mining's Arcata Mine was placed into care and maintenance early in the year; and declining silver grades were a factor at large primary copper mines. In Mexico, Fresnillo plc achieved lower grades at several of its mines; First Majestic Silver Corp.'s San Martin Mine and Endeavour Silver's El Cubo Mine were placed on care and maintenance; and blockades resulted in Newmont Corporation's Peñasquito Mino being suspended for 90 days.
Pricing and Outlook
A combination of a slightly higher demand and a slightly higher supply in 2019 compared to 2018 resulted in a surplus of 31.3 million ounces, or 3.1% of silver demand, according to The Silver Institute's World Silver Survey 2020. Net investment in exchange traded products of 81.7 million ounces helped to propel the net silver balance to a 50 million ounce deficit, or approximately 5% of demand.
In 2019, the average London Bullion Market Association ("LBMA") silver price increased 3.4% year-over-year to $16.21/oz. In 2019, the price of silver reached a high of $19.31/oz, a low of $14.38/oz and ended the year at $18.05/oz. The largest contributor to silver price movements is believed to be the ongoing trade dispute between the U.S. and China, which has had the impact of strengthening the U.S.
dollar and weighing on the price of silver and other precious metals. The U.S. Federal Reserve took a dovish stance through 2019, as it lowered the federal funds rate three times.
The price of silver rallied strongly to multi-year highs in August 2020. As of August 31, 2020, the LBMA silver price has increased 52% compared to the year-end 2019 price. The recent silver price appreciation is believed to have been driven by accommodative monetary policy, aggressive stimulus measures and accelerating investment demand in the midst of the COVID-19 pandemic, as well as disrupted production and a recovery in industrial consumption. These factors have enhanced silver's appeal to investors seeking a hedge against inflation, a decrease in the value of the U.S. dollar and inflation, attracting investors during timesgeneral economic and geopolitical uncertainty. Trading volumes at futures and options exchanges have increased significantly, and exchange-traded products ("ETPs") inflows have been strong. As of uncertainty. GFMS data indicatesAugust 31, 2020, silver has a long-term research analyst average consensus price outlook of $18.75/oz.
See "Silver Industry Overview."
High Quality and Long Life Assets
Once fully operational, the Cerro Los Gatos Mine is expected to generate average life-of-mine ("LOM") unlevered, after-tax free cash flow of approximately $76 million per year on a 100% basis (or approximately $39 million per year on a 51.5% basis). Projected attributable net revenue and unlevered free cash flow, as set forth in the Los Gatos Technical Report, are presented below:
Projected Net Revenue (in millions)
Projected Unlevered Free Cash Flow (in millions)
Net revenue is defined as net smelter return (revenue per tonne mined less the sum of concentrate refining, treatment and transportation costs per tonne mined), less royalties. Unlevered cash flow is defined as unlevered operating cash flow less capital expenditures and changes in working capital. See also Section 22 of the Los Gatos Technical Report. The Los Gatos Technical Report has an effective date of July 1, 2020. The mineral resource estimates contained in the Los Gatos Technical Report have an effective date of September 6, 2019. The mineral reserve estimates and the economic analysis contained in the Los Gatos Technical Report have an effective date of July 1, 2020 and exclude 655,746 tonnes of material that investors purchased nearly 300has been mined through June 30, 2020. For a discussion of the mineral resource estimates and mineral reserve estimates contained in the Los Gatos Technical Report, see "Business—The Los Gatos District—Mineral Resource Estimates—Cerro Los Gatos Mine, Esther and Amapola Deposits" and "Business—The Los Gatos District—Mineral Reserve Estimates—Cerro Los Gatos Mine." For a discussion of the assumed capital and operating costs in the Los Gatos Technical Report, see "Business—The Los Gatos District—Capital and Operating Costs." This information does not constitute guidance and you should not rely on it as an estimate or forecast of future performance. The Cerro Los Gatos net revenue and unlevered free cash flow are shown on a 51.5% ownership basis to reflect our current ownership interest in the LGJV. The 18.5% option represents our right to
repurchase an 18.5% interest in the LGJV from Dowa. See "Business—Business Strategy." The level of geological uncertainty associated with an inferred mineral resource is too high to apply relevant technical and economic factors likely to influence the prospects of economic extraction in a manner useful for evaluation of economic viability. Inferred mineral resources are subject to uncertainty as to their existence and as to their economic legal feasibility.
Cerro Los Gatos Mine Successfully Commissioned with Significant Near-Term Production Growth
The Cerro Los Gatos Mine is currently in production, with final construction completed in the second quarter of 2019. Commissioning was successful, having achieved a number of key milestones, including:
Aerial View of the Cerro Los Gatos Mine
Concentrate production is currently achieving quality specifications and expected grades. The Cerro Los Gatos Mine is expected to produce, on average, 12.2 million payable silver equivalent ounces annually through the existing mine life (or 6.3 million payable silver equivalent ounces annually on a 51.5% basis), with an attractive, low-cost all-in sustaining cost ("AISC") profile. In addition to the goal of achieving the plant's 2,500 tpd design capacity, we intend to use a portion of the proceeds from this
offering to complete a feasibility study, prepared in accordance with the SEC Mining Modernization Rules and NI 43-101, to expand the Cerro Los Gatos Mine production rate to 3,000 tpd. If feasible, we expect the LGJV to complete the expansion within the next three to four years.
The below graphs show our estimated payable silver equivalent production levels at the Cerro Los Gatos Mine in the coming years:
2020—2031 Cerro Los Gatos Mine Payable AgEq Production Estimate (Moz) and AISC ($/oz AgEq) on a 100% Basis
2020—2031 Cerro Los Gatos Mine Payable AgEq Production Estimate (Moz) and AISC ($/oz AgEq) on a 51.5% Basis
Payable silver equivalent calculated using feasibility study LOM average prices of $18.99/oz silver, $1,472/oz gold, $0.87/lb lead and $1.09/lb zinc. AISC calculated as sum of total operating costs, treatment and refining charges, penalties, transportation and freight, royalties and capital costs for each year. See Section 22 of the Los Gatos Technical Report. The Los Gatos Technical Report has an effective date of July 1, 2020. The mineral resource estimates contained in the Los Gatos Technical Report have an effective date of September 6, 2019. The mineral reserve estimates and the economic analysis contained in the Los Gatos Technical Report have an effective date of July 1, 2020 and exclude 655,746 tonnes of material that has been mined through June 30, 2020. For a discussion of the mineral resource estimates and mineral reserve estimates contained in the Los Gatos Technical Report, see "Business—The Los Gatos District—Mineral Resource Estimates—Cerro Los Gatos Mine, Esther and Amapola Deposits" and "Business—The Los Gatos District—Mineral Reserve Estimates—Cerro Los Gatos Mine." For a discussion of the assumed capital and operating costs in the Los Gatos Technical Report, see "Business—The Los Gatos District—Capital and Operating Costs." Based on production to date, we believe that the Cerro Los Gatos Mine has the
potential to produce up to 7.2 million ounces of silver equivalent on a 100% basis (3.7 million ounces of silver equivalent on a 51.5% basis) in 2010,fiscal year 2020.
Estimated mineral reserves at the Cerro Los Gatos Mine are summarized below:
Cerro Los Gatos Mineral Reserve Estimates as of the Effective Date of the Los Gatos Technical Report
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 | |||||||||||||||
Reserves based on a $75 Net Smelter Return ("NSR") cut-off value. NSR is defined as revenue per tonne mined less the sum of concentrate refining, treatment and strong growthtransportation costs per tonne mined. The mineral reserve estimates for the Cerro Los Gatos Mine reflect diluted grades with adjustment for metallurgical recovery. The mineral reserve estimates contained in investment demand continued into 2011,the Los Gatos Technical Report have an effective date of July 1, 2020 and exclude 655,746 tonnes of material that has been mined through June 30, 2020. Mineral reserve estimates and mineral resource estimates contained in the Los Gatos Technical Report have different effective dates and are based on different dilution and recovery factors and cut-off grades. For a discussion of the mineral reserve estimates contained in the Los Gatos Technical Report, see "Business—The Los Gatos District—Mineral Reserve Estimates—Cerro Los Gatos Mine."
Estimated mineral resources at the Cerro Los Gatos Mine are summarized below:
Cerro Los Gatos Mine Mineral Resource Estimates Inclusive of Mineral Reserves as total ETF holdings reached 576 million ounces.of the Effective Date of the Los Gatos Technical Report
Category | Tonnes (millions; 100% basis) | Tonnes (millions; 51.5% basis) | Ag (g/t) | Au (g/t) | Pb (%) | Zn (%) | Cu (%) | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
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 | |||||||||||||||
Measured & Indicated | 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 | |||||||||||||||
Based on a cut-off grade of 150 grams silver equivalent/tonne at assumed metal prices of $18.00/toz silver, $0.92/lb lead and $1.01/lb zinc; gold was not considered in silver equivalent calculation. The mineral resource estimates contained in the Los Gatos Technical Report have an effective date of September 6, 2019. The mineral resource estimates contained in the Los Gatos Technical Report are presented on an undiluted basis without adjustment for metallurgical recovery. Mineral reserve estimates and mineral resource estimates contained in the Los Gatos Technical Report have different effective dates and are based on different dilution and recovery factors and cut-off grades. For a discussion of the mineral resource estimates contained in the Los Gatos Technical Report, see "Business—The Los Gatos District—Mineral Resource Estimates—Cerro Los Gatos Mine, Esther and Amapola Deposits."
Business Strengths
Cerro Los Gatos Mine Mineral Resource Estimates Exclusive of Mineral Reserves as of the Effective Date of the Los Gatos Technical Report
Category | Tonnes (million; 100% basis) | Tonnes (million; 51.5% basis) | AgEq (g/t) | Ag (g/t) | Au (g/t) | Pb (%) | Zn (%) | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Measured | 1.3 | 0.7 | 442 | 181 | 0.39 | 2.4 | 4.5 | |||||||||||||||
Indicated | 2.2 | 1.1 | 368 | 139 | 0.23 | 2.1 | 4.2 | |||||||||||||||
Measured & Indicated | 3.5 | 1.8 | 395 | 154 | 0.29 | 2.2 | 4.3 | |||||||||||||||
Inferred | 3.7 | 1.9 | 361 | 107 | 0.28 | 2.8 | 4.0 | |||||||||||||||
Resources based on a cut-off grade of 150 grams silver equivalent/tonne at assumed metal prices of $18.00/toz silver, $0.92/lb lead and Competitive Advantages$1.01/lb zinc; gold was not considered in silver equivalent calculation. The mineral resource estimates contained in the Los Gatos Technical Report have an effective date of September 6, 2019. The mineral resource estimates contained in the Los Gatos Technical Report are presented on an undiluted basis without adjustment for metallurgical recovery. Reserves based on a $75 NSR cut -off value. NSR is defined as revenue per tonne mined less the sum of concentrate refining, treatment and transportation costs per tonne mined. The mineral reserve estimates for the Cerro Los Gatos Mine reflect diluted grades with adjustment for metallurgical recovery. The mineral reserve estimates contained in the Los Gatos Technical Report have an effective date of July 1, 2020 and exclude 655,746 tonnes of material that has been mined through June 30, 2020. Mineral reserve estimates and mineral resource estimates contained in the Los Gatos Technical Report have different effective dates and are based on different dilution and recovery factors and cut-off grades. For a discussion of the mineral resource estimates contained in the Los Gatos Technical Report, see "Business—The Los Gatos District—Mineral Resource Estimates—Cerro Los Gatos Mine, Esther and Amapola Deposits."
The economic analysis contained in the Los Gatos Technical Report is presented on an unlevered, post-tax, present value basis and has an effective date of July 1, 2020. The results of the economic analysis are summarized below:
Mine Life | years | 11 | ||||
Ore Tonnage | kt | 9,618 |
| Life-of-Mine Payable Production | Avg. Annual Payable Production | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Average Grade | ||||||||||
| (51.5% basis) | (51.5% basis) | |||||||||
| Processed | (100% 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 | ||||||||
Silver equivalent and by-product credits calculated using LOM average prices of $18.99/oz silver, $1,472/oz gold, $0.87/lb lead and $1.09/lb zinc. The economic analysis contained in the Los Gatos Technical Report has an effective date of July 1, 2020 and
excludes 655,746 tonnes of material that has been mined through June 30, 2020. For a discussion of the mineral resource estimates and mineral reserve estimates contained in the Los Gatos Technical Report, see "Business—The Los Gatos District—Mineral Resource Estimates—Cerro Los Gatos Mine, Esther and Amapola Deposits" and "Business—The Los Gatos District—Mineral Reserve Estimates—Cerro Los Gatos Mine." For a discussion of the assumed capital and operating costs in the Los Gatos Technical Report, see "Business—The Los Gatos District—Capital and Operating Costs."
Cerro Los Gatos Mine Unlevered Free Cash Flow Profile on a 100% Basis (in millions)
Attractive Assets in TwoCerro Los Gatos Mine Unlevered Free Cash Flow Profile on a 51.5% Basis (in millions)
See Section 22 of the World’s Premier SilverLos Gatos Technical Report. The economic analysis contained in the Los Gatos Technical Report has an effective date of July 1, 2020 and excludes 655,746 tonnes of material that has been mined through June 30, 2020. For a discussion of the mineral resource estimates and mineral reserve estimates contained in the Los Gatos Technical Report, see "Business—The Los Gatos District—Mineral Resource Estimates—Cerro Los Gatos Mine, Esther and Amapola Deposits" and "Business—The Los Gatos District—Mineral Reserve Estimates—Cerro Los Gatos Mine." For a discussion of the assumed capital and operating costs in the Los Gatos Technical Report, see "Business—The Los Gatos District—Capital and Operating Costs."
Additional Resource Growth Potential from Exploration of the Los Gatos District
In addition to the significant existing resources at the Cerro Los Gatos Mine, the Los Gatos District also contains the Esther and Amapola deposits and 11 other mineralized zones. With control of the concessions, the ability to develop the entire 103,087-hectare land position and more than 85% of the land position yet to be explored, we expect that we will stand to benefit from mineralization beyond those already identified in the 14 mineralized zones, which include the Cerro Los Gatos Mine, the
Esther deposit and the Amapola deposit. The mineral resource estimates for the Esther and Amapola deposits are set forth below:
Esther and Amapola Deposit Mineral Resource Estimates as of the Effective Date of the Los Gatos Technical Report
| | Category | Tonnes (millions; 100% basis) | Tonnes (millions; 51.5% basis) | Ag (g/t) | Au (g/t) | Pb (%) | Zn (%) | Cu (%) | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Esther Deposit | 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 | 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 | |||||||||||||||||
Based on a cut-off grade of 100 grams silver equivalent/tonne using metal prices of $22.30/toz silver, $0.97/lb lead, and $0.91/lb zinc. The mineral resource estimates for the Esther and Amapola deposits have an effective date of December 21, 2012. The mineral resource estimates contained in the Los Gatos Technical Report are presented on an undiluted basis without adjustment for metallurgical recovery. Mineral reserve estimates and mineral resource estimates contained in the Los Gatos Technical Report have different effective dates and are based on different dilution and recovery factors and cut-off grades. For a discussion of the mineral resource estimates contained in the Los Gatos Technical Report, see "Business—The Los Gatos District—Mineral Resource Estimates—Cerro Los Gatos Mine, Esther and Amapola Deposits."
Assets Located in Geopolitically Safe and Established Mining Regions
Sunshine Silver’s principal assets are located in two of the world’s premier silver regions. The Sunshine Mine propertyLos Gatos District is located in one of the Coeur d’Alene Mining District in Idaho, which district is estimated to have produced over one billion ounces ofworld's premier silver over approximately the last century, and the Los Gatos Project is located inmining regions: the Mexican Silver Belt, which was the world’sworld's largest silver producing region in 2011. In2019. Based on a survey published in 2019 by the Fraser Institute, an independent research organization, Mexico is highly ranked among silver mining jurisdictions worldwide in terms of the attractiveness of investment. Mexico also has a long history of successful mineral development and operations, which we believe makes it a desirable jurisdiction in which to conduct mining operations due to stable political, tax and regulatory policies.
Mexico is the largest producer of silver in the world, in addition to being locateda top-10 producer of gold, lead and zinc, among other major commodities. According to the 2019 Fraser Institute survey, Mexico ranks ahead of many countries in premier silver regions, both assets possess characteristics that differentiate them from other silver projects:
Sunshine Mine Property
Oneterms of the highest-grade known remaining primary-silver discoveries worldwide, estimated to contain 2,880,312 tonnes of mineralized material at an average silver grade of 781.7 grams/Tonne (inclusive of expectedinvestment attractiveness for mining, dilution)
The recently-completed Sunshine Mine Technical Report and Preliminary Economic Assessment indicates a robust silver project with potential for near-term significant production and cash flow
Silver-bearing concentrate production expected to commence in late 2014
Significant existing infrastructure, including an operational primary shaft, which is being modernized and upgraded, a secondary shaft that is being refurbished, access to roads, power and water, and all environmental permits to begin surface and sub-surface operations, with the exception of applicable construction permits
Consolidated land position of approximately 3,901 hectares representing the ability to allow drilling access from surface locations to newbut behind certain areas of potential mineralization that remain highly prospective with new veins and vein extentions discovered since the 2011 exploration program began
Strong community support coupled with an experienced and skilled workforce, including deep underground Idaho Silver Valley experience
A prolific past-producing mine, once one of the largest silver producers in the United States, whichU.S., Canada and Australia. In the mining sector, foreign ownership of Mexican companies is estimatednot subject to have produced over 365 million ounces of silver
Underexplored geological structure with significant upside potential, as evidenced byrestrictions. The Mexican government is focused on improving infrastructure, primarily in the continuing discovery of new veins throughout the Idaho Silver Valley
Los Gatos Project
Control overpower grid and the ability to develop an emerging silver region; land position of 149,083 hectaresroad networks.
The Cerro Los Gatos deposit is estimated to contain 5,270,000 tonnes of mineralized material at an average grade of 179 grams/Tonne silver, 2.0% lead and 4.2% zinc; the Esther deposit is estimated to contain 620,000 tonnes of mineralized material at an average grade of 113 grams/Tonne silver, 0.6% lead and 1.7% zinc; and the Amapola deposit is estimated to contain 480,000 tonnes of mineralized material at an average grade of 101 grams/Tonne silver, 0.1% lead and 0.2% zinc (estimates are undiluted in-situ)
Demonstrated lateral continuity and thickness of mineralization
Widespread mineralization beyond the Cerro Los Gatos, Esther and Amapola zones, with 10 other priority targets
More than 85% of land position yet to be drilled
Supportive local community and state government and well tested legal and land tenure system
Sunshine Mine Historical Production and Recent Accomplishments Enhance Operating SuccessSite Exploration Potential Provides Opportunity for Significant Resource Conversion Beyond Existing Mine Plan
Sunshine Silver believes We believe that the significant historical production at the Sunshine Mine, combined with the recent and planned mine improvements, lowers project risk and enhances the likelihood of operating success of the project. Significant time and capital investment will be required before the Sunshine Mine returns to production and the Company anticipates that it will continue to incur operating costs without realizing any revenues at the Sunshine Mine until at least late 2014, including costs related to intensive underground exploration, rehabilitation and refurbishment of mine and processing infrastructure and further dewatering of underground workings. The underground workings consist of multiple levels developed off the main production shaft, extending from the surface to a depth of over 1,825 meters, or more than 1,000 meters below sea level.
Since acquiring the Sunshine Mine, the Company has acquired additional surface rights and improved the existing infrastructure, repaired surface facilities and equipment, completed a number of environmental, health and safety upgrades and identified and accessed a newly discovered portion of the resource that could be mined in the near future. The Company has added experienced and highly-trained professionals to lead such improvements. The Company has accomplished the following at the Sunshine Mine:
Initiated and expanded exploration drilling
Discovered an extension of the Sunshine Vein across the Chance Fault, an extension of the Yankee Boy Split Vein and the new “10” vein
Retained project engineering and development managers
Engaged geologic resource, metallurgical, environmental, hydrologic and mine planning consultants
Initiated metallurgical design work for a new process plant
Initiated a third party concentrate marketing study for silver-bearing concentrates
Managed the completion of a 3D block model with over 130,000 data points
Started modernizing the Silver Summit shaft and mined two declines for exploration platforms and access within the mine
Completed an independent technical report in accordance with NI 43-101 and the requirements of Industry Guide 7
Completed a preliminary economic assessment, which indicated mineralized material production could begin in the second quarter of 2014
Significant Exploration Potential for Additional Silver Resources
Sunshine Silver believes that itsour properties have significant exploration upside with numerous opportunities to define additional mineral resources through continued exploration of its properties:exploration.
Los Gatos District
The Los Gatos District is located in the Mexican Silver Belt, near several other silver assets owned by large public companies. The Mexican Silver Belt has experienced significant exploration success, and the Los Gatos District represents an underexplored property where there has been little historical workings or previous exploration.
Sunshine Mine: Sunshine The Los Gatos District contains numerous significant high-grade targets throughout. Previous work done has resulted in a 190% increase in measured and indicated silver equivalent resources from March 2014 to September 2019, with additional exploration planned using proceeds from this offering.
Cerro Los Gatos Mine Measured & Indicated Ore Tonnage (Mt) and Silver has rights to approximately 3,901 hectaresGrade (g/t) (100% Basis)
Mineral resource estimates presented include mineral reserves. Based on a cut-off grade of exploration ground150 grams silver equivalent/tonne at assumed metal prices of $18.00/toz silver, $0.92/lb lead and $1.01/lb zinc; gold was not considered in silver equivalent calculation. The mineral resource estimates contained in the SunshineLos Gatos Technical Report have an effective date of September 6, 2019. The mineral resource estimates contained in the Los Gatos Technical Report are presented on an undiluted basis without adjustment for metallurgical recovery. Mineral reserve estimates and mineral resource estimates contained in the Los Gatos Technical Report have different effective dates and are based on different dilution and recovery factors and cut-off grades. For a discussion of the mineral resource estimates contained in the Los Gatos Technical Report, including mineral resource estimates exclusive of mineral reserves, see "Business—The Los Gatos District—Mineral Resource Estimates—Cerro Los Gatos Mine, property.Esther and Amapola Deposits."
The property has numerous well-defined exploration targets, many of which are extensions of past-producing silver veins. In addition, Sunshine Silver has acquired additionalLGJV owns the surface rights to further consolidate its ownership of this mineralized trend. Despite being a prolific silver producing region, Sunshine Silver believes that the Coeur d’Alene Mining District is still highly under explored. Through application of modern exploration technologies and processes, Sunshine Silver has discovered an extension of the Sunshine Vein across the Chance fault and several other high-grade veins and vein extensions.
Los Gatos Project: Sunshine Silver expects to expand5,479 hectares covering the Cerro Los Gatos Mine and the Esther and Amapola deposits and the Gavilana (Paula) and San Luis zones, and has been granted mineral concessions for all 103,087 hectares, with 17 contiguous concessions in the Los Gatos District. We have identified 14 mineralized zones within the concessions. Of the 14 mineralized zones, the LGJV has established mineral resource estimates only at the Cerro Los Gatos Mine, the Esther deposit and the Amapola deposit and has conducted drilling on only 15 kilometers out of a strike length of over 150 kilometers of quartz veining along the Los Gatos District.
Location of the Cerro Los Gatos District
Mineralized Zones Grade Intercepts
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 | |||||||||
The table above does not include Ocelote and Wall-E/Ava zones, as they do not have sufficient drilling.
The current resources are significant, but we believe that additional resource potential remains in the immediate area. Drill testing of other high-priority targets within the Los Gatos District has been relatively limited given our focus on delineation of reserves at, and construction of, the Cerro Los Gatos Mine. As a result, the highly prospective Los Gatos District remains underexplored. Drilling at the Esther deposit to date has demonstrated good grade continuity along the system and characteristics similar to that identified during preliminary work at the Cerro Los Gatos Mine. Following potentially positive results from infill drilling at the Esther and Amapola deposits, we expect to update the
resources and perform a scoping study to determine if these two deposit areas could generate economic production, representing further upside potential for the broader Los Gatos District.
We expect to perform additional definition drilling to expand the Southeast and Northwest zones of the Cerro Los Gatos Mine and to perform additional drilling to expand the Esther and Amapola deposits, which remain open to extensions at depth. Sunshine Silver also hasIn addition to the Cerro Los Gatos Mine, the Esther deposit and the Amapola deposit, we have identified 1011 other priority targets. Sunshine Silver hasonly conducted drilling on 15 kilometers out of over 100 kilometers of strike length of quartz veining alongmineralized zones defined by high-grade drill intersections in the Los Gatos Project property’s 149,083 hectares.District.
Other Exploration Opportunities
Other opportunities: Sunshine Silver owns 21 other exploration propertiesIn addition to the Los Gatos District, we have 100% control of the Santa Valeria property, located in Chihuahua, Mexico, which is comprised of 1,543 hectares and Idaho, which could provide additionalfurther opportunities for resource growth.
Politically Stable and Mining-Friendly JurisdictionsExposure to Rapidly Improving Silver Fundamentals
Both Idaho The value of silver is driven by two main factors: first, silver has a number of distinctive physical and Mexico are jurisdictions with a long historychemical properties that make it an essential and difficult-to-substitute component in several industrial applications; and second, in times of successful mineral development and operations. Both are considered desirable jurisdictions in which to conduct mining operations due to stable political, tax and regulatory policies. Based on a survey published in February 2012 by the Fraser Institute, an independent research organization, Idaho and Mexico rank among the top silver mining jurisdictions worldwide in terms of the attractiveness of government policies, access to infrastructure and qualified labor availability.
Attractive Market Dynamics
Investment demand for silver exposure remains strong, driven in part by continued U.S. dollar weakness, ongoing economic uncertainty, in Europe and political unrest in the Middle East and elsewhere. Historically, silver has beenis viewed as an effectiveattractive hedge against inflation and a decrease in the value of the U.S. dollar and inflation,dollar.
attracting investors during times of uncertainty. In addition, industrialIndustrial demand for silver continues to increase, driven by newelectrical and electronics applications as well as emerging applications for silver such as solar energy, medical applications and water purification, which the Company believes willwe believe enhance the strong supply and demand fundamentals of silver. Moreover, investment demand for silver exposure has strengthened, driven in part by accommodative monetary policy, aggressive stimulus measures and an uncertain economic environment in connection with the COVID-19 pandemic. In 2019, the silver market posted a net deficit (including the impact of exchange-traded products) representing approximately 5% of demand.
Despite this strong investment and industrial demand, the universe of primary silver companies is small, which limitshas created a scarcity of investor options for silver exposure. Sunshine Silver represents anWe believe we represent a highly attractive opportunity for investors to gain exposure to a primary silver company with two attractive assets.a world-class asset.
Experienced Management Team and Board of Directors
Sunshine Silver has We have an experienced and growing management team with a track record of successfully identifying and developing mineral discoveries. The Company’s Executive Chairman &
Stephen Orr, Chief Executive Officer Stephen Orr,and Director, who joined the Company in 2011, has 35more than 40 years of experience in the mineralsmining industry, principally with Homestake Mining Company, where he ultimatelyincluding international commercial experience at both executive and operational levels. Previously, Mr. Orr served as Presidentpresident, director and chief executive officer at Ventana Gold Corp., a Vancouver-based mineral exploration and development company, as director and chief executive officer at OceanaGold Corporation ("OceanaGold"), where under his leadership OceanaGold built and commissioned two new mines in New Zealand, as vice president of Homestake Canada Inc.;North American operations and then managing director of Australia and Africa operations at Barrick Gold Corporation whereand as president and chief executive officer at Homestake Canada Inc. Mr. Orr has notified the Board of Directors that he was Managing Director of Australia & Africa operations; OceanaGold Limited, where he servedintends to retire as Chief Executive Officer;Officer within one to two years following the completion of this offering. Accordingly, the Board of Directors has initiated efforts to recruit an experienced executive as President, who will work closely with Mr. Orr and Ventana Gold Corp., where he was President &be considered to succeed Mr. Orr as Chief Executive Officer. The Company’sWe intend for Mr. Orr to continue to serve on our Board of Directors after his retirement as Chief Executive Officer.
Roger Johnson, Chief Financial Officer, Roger Johnson,who joined the Company in 2011, has 33more than 40 years of experience in financial management ofin the minerals industrymining industry. Previously, Mr. Johnson served as vice president and chief accounting officer at Newmont Mining Corporation (now Newmont Corp.), as senior vice president, finance and administration at Pasminco Zinc, Inc., and as vice president, controller at Kennecott Utah Copper LLC and practiced public accounting with Coopers & Lybrand as a public accountant; Kennecott Utah Copper Corporation, as(now PricewaterhouseCoopers LLP).
Philip Pyle, Vice President Controller; Pasminco Zinc, Inc., as Senior Vice President, Financeof Exploration and Administration; and Newmont Mining Corporation, where he was Vice President, Chief Accounting Officer. The Company’s Chief Operating Officer, John Galassini,Geologist, who joined the Company in 2011, has 25more than 40 years of experience in the minerals industry with Phelps Dodge Corporation, where he ultimatelymining industry. Previously, Mr. Pyle served as Seniorvice president—exploration at Los Gatos Ltd., as exploration manager at Linear Gold Corp. (now Fortune Bay Corp.), as exploration manager at MIM Exploration Pty Ltd., as exploration manager at BHP Minerals International Exploration Inc. and as a geologist at AMAX Exploration Inc.
John Kinyon, Vice President North America; Freeport McMoRan Copper &of Operations, who joined the Company in 2012, has more than 40 years of U.S. and international operations and construction experience, including experience in various mining positions in the U.S., Canada, Tanzania, Australia, and New Zealand. Previously, Mr. Kinyon served as vice president and general manager at Coeur Mining Inc.'s Kensington Mine in Juneau, Alaska, as vice president of operations at OceanaGold, as general manager at Yukon Zinc Corporation ("Yukon Zinc") and as general manager at Eskay Creek at Barrick Gold Corporation.
Luis Felipe Huerta, Project Director of the Cerro Los Gatos Mine, who joined the Company in 2015, has more than 20 years of project management experience in the mining industry. Previously, Mr. Huerta served as project manager at Continental Gold Inc., as Senior Vice President;project manager at Fortuna Silver Mines Inc., and Kinross Gold Corporation, where he served as Regional Vice President North America. The Company’s Vice President of Exploration, Phil Pyle,project superintendent at Compañía Minera Milpo.
Adam Dubas, Chief Administrative Officer, who joined the Company in 2011, has 33more than 20 years of experience in the minerals industry with Linear Gold (now Brigus),financial management. Previously, Mr. Dubas served as our Corporate Controller, as a senior manager at KPMG LLP, where he servedfocused on the energy industry, and as Exploration Manager, andan international financial analyst at MIM Exploration, BHP Minerals and AMAX Exploration. He served as Vice President Exploration for Los Gatos since 2008. The Company’s VP Investor Relations, Monica Brisnehan, has 16 yearsSprint Corporation.
Our Board of capital markets and mineral industry experience, including as Director of Investor Relations at Newmont Mining Corporation.
The BoardDirectors is comprised of senior mining and financial executives who have broad domestic and international experience in mineral exploration, development and mining. The Company’s senior management andOur Board of Directors has been established with individuals who have in excess of 300 years of combinedcareer backgrounds at notable mining experience. Sunshine Silver believescompanies. We believe that the specialized skills and knowledge of the management team and of the Board of Directors will significantly enhance Sunshine Silver’sour ability to explore and develop the Sunshine Mine property and the Los Gatos ProjectDistrict and to pursue other regional growth opportunities.
Shareholder Sponsorship
The Company Thomas S. Kaplan, Chairman of the Board of Directors, is chairman and its predecessors were founded by affiliateschief executive officer of The Electrum Group LLC, a privately-held global natural resources investment management company. Dr. Kaplan has over 25 years of experience in the resources sector. Dr. Kaplan served as chairman of Leor Exploration & Production LLC, a natural gas exploration and development company, which he founded in 2003 and sold in 2007 to EnCana Corporation. Dr. Kaplan intends to resign from the Board of Directors contingent upon and effective immediately prior to the effectiveness of the registration statement of which this prospectus forms a part.
Janice Stairs, Lead Director, was general counsel and corporate secretary at Namibia Critical Metals Inc., general counsel at Endeavour Mining Corporation, and vice president and general counsel at Etruscan Resources Inc. Ms. Stairs has more than 30 years of experience in the resources sector, including service on the board of directors of Gabriel Resources Ltd., Trilogy Metals Inc., and Marathon Gold Corporation. Ms. Stairs will become the Chair of the Board of Directors immediately prior to the effectiveness of the registration statement of which this prospectus forms a part.
Jeb Burns, Director, is the chief investment officer of the Municipal Employees' Retirement System of Michigan and serves on the investment committee of Western Michigan University Foundation, the board of directors of Pacific Pension & Investment Institute, the board of directors of
the Michigan History Foundation, the board of trustees of Mackinac Associates, and the board of directors of Venture Michigan Fund. Mr. Burns has nearly 20 years of investment and asset management experience. Mr. Burns intends to resign from the Board of Directors contingent upon and effective immediately prior to the effectiveness of the registration statement of which this prospectus forms a part.
Ali Erfan, Director, is vice chairman of The Electrum Silver HoldingsGroup LLC, a privately-held global natural resources investment management company. Mr. Erfan is a founding board member of Leor Energy. Mr. Erfan has more than 20 years of experience in senior roles in the venture capital and private equity industry.
Igor Gonzales, Director, is the chief operating officer at Appian Capital Advisory, a leading investment advisor in the metals and mining industry. Mr. Gonzales has more than 30 years of experience in the mining industry.
Karl Hanneman, Director, is chief executive officer of International Tower Hill Mines, Ltd., where he leads a team advancing a 10-million-ounce gold resource in Alaska through project optimization. Mr. Hanneman has more than 35 years of mining industry management and technical experience as an executive, manager, mining engineer, mine operator and entrepreneur.
Charles Hansard, Director Nominee, has over 25 years of experience in corporate governance at the board of directors level, including as chairman of African Platinum Plc.
Igor Levental, Director, is president of The Electrum Group LLC, a privately-held global natural resources investment management company. Mr. Levental has held senior executive positions with major mining companies, including Homestake Mining Company and International Corona Corp. Mr. Levental has more than 30 years of experience across a broad cross-section of the international mining industry.
David Peat, Director, was vice president and chief financial officer at Frontera Copper Corporation, vice president and global controller at Newmont Mining Corporation and vice president of finance and chief financial officer at Homestake Mining Company. Mr. Peat has more than 30 years of experience in financial leadership in support of mining corporations.
Shareholder Support
We were founded by The Electrum Group LLC and CGT Management Ltd. (which entities have since transferred their sharescertain of the Company to Electrum Silver US LLC), Tigris Financial (International) L.P. and Tigris Financial Group Ltd., all of which are our stockholders.its affiliates. We refer to these entitiesThe Electrum Group LLC and its affiliates in this prospectus, individually and collectively, as “Electrum.” The"Electrum." Electrum Group LLC is an investment advisor whose team has historically focused on making strategic investments in precious metals resources and hydrocarbons. The Company believesWe believe that access to the specialized skills and knowledge within Electrum will significantly enhance Sunshine Silver’sour ability to execute itsour business strategy.
In March 2011, Liberty Metals & Mining Holdings, LLC, or Liberty Metals & Mining, purchased 15% The Municipal Employees' Retirement System of Michigan ("MERS") is an independent, professional retirement services company that was created to administer the Company’s common stock. Liberty Metals & Mining isretirement plans for Michigan's local units of government on a wholly-owned subsidiary of Boston-headquartered Liberty Mutual Group. As of December 31, 2012, Liberty Mutual Group had approximately $78 billion of total invested assets. As a subsidiary of Liberty Mutual Group, Liberty Metals & Mining makes investments in the metals and mining sector for Liberty Mutual Group.not-for-profit basis.
Following the completion of this offering and after giving effect to the offering,Reorganization, Electrum and Liberty Metals & MiningMERS will beneficially own approximately % and % of the Company’sour outstanding common stock, respectively, assuming the over-allotment option is not exercised by the underwriters.underwriters, and Electrum will continue to have a presence on the Board of Directors.
See "Business—Key Investment Highlights—Shareholder Support."
Sunshine Silver’s Our business strategy is focused on creating value for stakeholders through the ownership and advancement of its two principal projects, projects—the SunshineCerro Los Gatos Mine property and the Los Gatos Project, District—and through the pursuit of similarly attractive silver-focused projects. Sunshine Silver expects to commence concentrateThe LGJV commenced production at the SunshineCerro Los Gatos Mine in late 2014. Sunshine Silver does not expectthe third quarter of 2019. We intend to enter into productionachieve these objectives through the following value-enhancing near-term and long-term initiatives:
Sunshine Silver plans to:
Working Capital Facility will reduce our borrowing costs.
The Company intends to continue with its surface and underground exploration drilling program to provide sufficient sampling to estimate grade, tonnage and location of additional potentially economic veins and deposits for future production and to upgrade mineralized material to reserves.project. In addition Sunshine Silver may completeto increasing our economic interest in the Cerro Los Gatos Mine, we expect that this repurchase will also provide us with greater exposure to potential upside from additional exploration within the Los Gatos District, in particular the Esther and Amapola deposits. Following this increase in our ownership interest in the LGJV, we will continue to 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 (such as certain approvals, the creation of security interests on property, any initial public offering of the joint venture, and litigation settlements). See "Business—The Los Gatos District—Unanimous Omnibus Partner Agreement" for more information.
See "Business—Business Strategy."
Re-CommissionImpact of the COVID-19 Pandemic
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 response to the order, the LGJV effected a 45-day temporary suspension of all non-essential activities at the Cerro Los Gatos Mine site, which reduced the number of employees and contractors at the site and the Chihuahua corporate office. During the temporary suspension, the LGJV implemented health protocols, allowed most administrative and technical services employees to work remotely, reduced mining and milling, completed project enhancements and finalized a mine plan upon reactivation of mining activities after the temporary suspension.
In late May 2020, the Mexican government designated mining an essential service and allowed mines to resume production, subject to deploying COVID-19 prevention protocols. Our existing COVID-19 protocols exceeded those mandated by the Mexican government and, accordingly, the LGJV reactivated mine development and mining in late May 2020 and hired additional employees. Ore processing resumed in early June 2020. In order to maintain social distancing and best practice protocols, public areas, such as the residential camps' cafeterias, limited the number of personnel. Food service periods were extended with employees assigned specific times for meals. Face masks are required in offices and other public areas. Daily working shift times are staggered to limit the number of employees in changing areas and pre-shift work meetings. Two sterilization tunnels have been installed at the main entry gate and at the entrance to the cafeteria. All individuals entering the Cerro Los Gatos Mine site are subject to a rapid test to screen for COVID-19 and, if an individual tests positive on the rapid test and on a secondary molecular test, the individual will be subject to quarantine protocols and removed from the mine site. In the event of an outbreak of COVID-19 on site, we could determine that a full suspension of our operations is necessary for the safety and protection of the workers.
The COVID-19 pandemic has temporarily affected our financial condition, in part due to the loss of revenue resulting from the 45-day temporary suspension of all non-essential activities at the LGJV's Cerro Los Gatos Mine site and the expenses associated with the development and implementation of COVID-19 protocols. In addition, as the LGJV reactivated mine development and mining, it implemented a scalable optimized plan with a lower employee complement and with reduced average monthly production rate at 1,750 tpd until September 2020, targeting higher ore grades. This may result in higher per tonne mining, processing and sustaining capital costs than previously anticipated. We intend to ramp up to the 2,500 tpd design capacity beginning in September 2020 with the goal of reaching the 2,500 tpd design capacity in January 2021.
If the Mexican government were to reinstate the suspension order caused by the COVID-19 pandemic, or if all mining activities at the Cerro Los Gatos Mine site were suspended for an undefined period of time, there could be additional costs incurred, production and development delays, cost overruns and operational restart costs. In addition, given that our management travels regularly between Mexico City and the Cerro Los Gatos Mine site, any restrictions on travel within Mexico may adversely affect our management's ability to oversee ongoing mining activities at the Cerro Los Gatos Mine and our ability to achieve our business objectives and milestones. See "Risk Factors—Risks Related to Our Business and Industry—Our business could be adversely affected by the effects of health epidemics, including the recent COVID-19 pandemic, in regions where we conduct our business operations."
Before you invest in our common stock, you should carefully consider all the information in this prospectus, including matters set forth under the "Risk Factors" section. These risks represent challenges to the successful implementation of our strategy and future profitability of our business. These risks include:
Implications of Becoming an Emerging Growth Company
As a company with less than $1.07 billion in revenue during our last fiscal year, we qualify as an "emerging growth company" as defined in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"). An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include:
We may take advantage of these provisions until the last day of our fiscal year following the fifth anniversary of the completion of this offering or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company upon the earliest of: (i) the last day of the first fiscal year in which our annual gross revenues are $1.07 billion or more; (ii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities; or (iii) the date on which we are deemed to be a "large accelerated filer," which will occur as of the end of any fiscal year in which we (x) have an aggregate market value of our common stock held by non-affiliates of $700 million or more as of the last business day of our most recently completed second fiscal quarter, (y) have been required to file annual and quarterly reports under the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), for a period of at least 12 months and (z) have filed at least one annual report pursuant to the Exchange Act. 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 this prospectus and our periodic reports and proxy statements.
We have elected to take advantage of some of the reduced disclosure obligations listed above in this prospectus and may elect to take advantage of other reduced reporting requirements in future filings. In particular, we have elected to adopt the reduced disclosure with respect to our executive compensation disclosure. As a result of this election, the information that we provide to shareholders may be different from that you might get from other public companies.
The JOBS Act permits an emerging growth company like us to 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.
See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Jumpstart Our Business Startups Act of 2012."
Corporate Information and Reorganization
We were formed on February 2, 2011, when our predecessor Precious Metals Opportunities LLC, which was formed in December 2009, converted to a Delaware corporation. On March 1, 2011, Los Gatos Ltd. merged with and into us to form Sunshine Silver Mines Corporation. In 2014, we changed our name to Sunshine Silver Mining & Refining Corporation.
Immediately prior to the closing of this offering, we intend to effect the Reorganization in which (i) SOP will convert into a Delaware corporation named Silver Opportunity Partners Corporation, (ii) each shares of our common stock outstanding immediately prior to the Reorganization will be reclassified into (A) shares of our common stock and (B) shares of common stock of SOP Corporation and (iii) we will change our name from Sunshine Silver Mining & Refining Corporation to Gatos Silver, Inc. SOP currently holds our interest in the Sunshine Mine to Long-Term Sustainable Production
Sunshine Silver intends to upgrade or replace existing infrastructure atComplex, which is located in the Sunshine MineCoeur d'Alene Mining District in connection with its modernizationIdaho and rehabilitation efforts and to review process optimization alternatives. The re-commissioningis comprised of the Sunshine Mine will be designedand the Sunshine Big Creek Refinery. Through the Reorganization, we expect to allowdistribute all of our equity interest in SOP to our shareholders immediately prior to the Company to reach a safe and sustainable production rate utilizing its newly optimized facilities.completion of this offering.
A chart of our project ownership structure after the Reorganization is set out below.
Advance Development
In this graphic, green rectangles represent legal entities and grey circles depict the mining operations owned by such legal entities.
The Company plans to accelerate its exploration program at the Los Gatos region through additional drilling with the intent of identifying additional mineralized material within the established ten additional target areas. In the near term, the Company also intends to progress the most advanced exploration sites, the Cerro Los Gatos, Esther and Amapola zones, through additional in-fill and stepout drilling (expected to recommence in the second quarter of 2013), beginning decline development (expected to commence in the first quarter of 2014) and completion of a pre-feasibility study.
Conduct Further Exploration at Sunshine Silver’s Mexican Properties Outside the Los Gatos Region and Apply for Additional Exploration Acreage
Sunshine Silver plans to expand its exploration programs at its Mexican properties outside the Los Gatos region and continue to grow its land position. The Company owns or controls a portfolio of 19 other exploration properties in Mexico covering an area of 420,895 hectares, with significant additional hectares under application
for mineral concession. There are three projects underway with significant drill results: El Doctor in Oaxaca, Santa Valeria in Chihuahua and Zacatlan in Puebla. Additional drilling is planned at these projects as well as additional targets through 2013. The Company is planning sufficient drilling in an effort to outline continuous geometry of mineralization at El Doctor, Santa Valeria and Zacatlan, which could lead to initial estimates of mineralized material.
Identify and Pursue Other Growth Opportunities that Add Value to Stockholders
Given the management and Board’s strong track record in exploration, development and asset integration, the Company may pursue acquisitions and joint ventures that are value accretive to its stockholders through the pursuit of similarly attractive silver-focused projects.
Recent Developments
Exploration drilling at the Sunshine Mine property in Idaho from accessible underground workings has resulted in the discovery of a new deeper vein referred to as the “10 vein,” a mineralized extension to the Sunshine vein in a previously unexplored area and continuity of the South Yankee Boy and Yankee Boy Split veins. Results from recent drilling are as follows:
Hole | From (meters) | To | Thickness (meters) | Ag (g/t) | Cu (%) | Pb (%) | Vein | |||||||
ST2627 | 226.37 | 227.74 | 1.37 | 227.0 | 0.1 | 0.0 | Sunshine | |||||||
ST2627 | 293.75 | 294.75 | 1.0 | 495.0 | 0.65 | 0.51 | 10 | |||||||
ST2628 | 262.13 | 262.98 | 0.85 | 1379.0 | 0.99 | 0.0 | Sunshine | |||||||
ST2628 | 332.41 | 334.91 | 2.5 | 554.0 | 0.25 | 6.7 | 10 | |||||||
ST2629 | 206.58 | 208.88 | 2.3 | 2445.0 | 0.76 | 0.02 | Sunshine | |||||||
ST2629 | 265.42 | 266.37 | 0.95 | 220.0 | 0.09 | 0.45 | 10 | |||||||
ST2630 | 216.18 | 217.66 | 1.48 | 2334.6 | 0.10 | 0.01 | Sunshine | |||||||
ST2630 | 278.35 | 280.45 | 2.10 | 45.0 | 0.01 | 1.27 | 10 | |||||||
ST2631 | 228.96 | 229.11 | 0.15 | 2191.0 | 1.00 | 0.16 | Sunshine | |||||||
ST2631 | 294.73 | 295.86 | 1.13 | 1234.0 | 0.1 | 57.4 | 10 | |||||||
ST2632 | 241.49 | 242.37 | 0.88 | 303.0 | 0.1 | 0.0 | Sunshine | |||||||
ST2634 | 220.64 | 221.55 | 0.91 | 252.0 | 0.07 | 0.00 | Sunshine | |||||||
ST2635 | 225.64 | 225.85 | 0.21 | 316.0 | 0.09 | 0.08 | Sunshine | |||||||
ST2635 | 284.91 | 288.51 | 3.60 | 250.0 | 0.07 | 6.90 | 10 | |||||||
ST2636 | 213.05 | 213.75 | 0.70 | 183.0 | 0.03 | 1.89 | Sunshine | |||||||
ST2637 | 245.9 | 247.4 | 1.50 | 429.0 | 0.23 | 0.02 | Sunshine | |||||||
ST2637 | 250.0 | 250.9 | 0.90 | 1422.0 | 1.00 | 0.08 | Sunshine | |||||||
ST2637 | 312.5 | 315.5 | 3.00 | 74.0 | 0.01 | 2.39 | 10 | |||||||
ST2638 | 265.4 | 266.3 | 0.9 | 778.0 | 0.42 | 0.00 | Sunshine | |||||||
ST2638 | 334.3 | 335.0 | 0.7 | 341.0 | 0.9 | 9.90 | 10 | |||||||
ST2640 | 233.7 | 233.9 | 0..2 | 1025 | 0.33 | 0.00 | Sunshine | |||||||
ST2641 | 224.9 | 226.7 | 1.8 | 2986.0 | 0.68 | 0.00 | Sunshine | |||||||
ST2642 | 220.4 | 220.5 | 0.1 | 792.0 | 0.29 | 0.73 | Sunshine | |||||||
ST2643 | 236.8 | 237.1 | 0.3 | 696.0 | 0.24 | 0.00 | Sunshine | |||||||
ST2644 | 258.3 | 260.7 | 2.4 | 292.0 | 0.16 | 0.02 | Sunshine | |||||||
ST2644 | 314.5 | 314.9 | 0.4 | 483.0 | 0.08 | 20.3 | 10 | |||||||
ST2646 | 168.0 | 168.8 | 0.8 | 276.0 | 0.10 | 0.00 | South Yankee Boy | |||||||
ST2647 | 86.6 | 86.8 | 0.2 | 242.0 | 0.38 | 0.00 | South Yankee Boy | |||||||
ST2648 | 90.2 | 90.3 | 0.1 | 7279.0 | 4.28 | 15.10 | South Yankee Boy | |||||||
ST2648 | 168.9 | 170.1 | 1.2 | 288.0 | 0.19 | 0.06 | South Yankee Boy | |||||||
ST2649 | 172.7 | 177.4 | 4.7 | 2251.0 | 0.58 | 2.20 | South Yankee Boy | |||||||
ST2650 | 184.6 | 185.1 | 0.5 | 210.0 | 0.10 | 0.45 | South Yankee Boy |
Holes ST2633, ST2639 and ST2645 did not detect significant mineralization.
Additional drilling is now focused on the exploration decline from the Sterling tunnel to further delineate mineralization encountered in both the upward vertical extension of the Sunshine vein and the newly discovered 10 vein.
Corporate Information
Sunshine Silver Mines Corporation is incorporated in Delaware. Sunshine Silver’sOur principal executive office is located at 370 17th1660 Lincoln Street, Suite 3800,2750, Denver, Colorado 80202. The Company’s80264. Our telephone number is (303) 784-5350.
THE OFFERINGTable of Contents
Common stock offered in firm commitment offering | | shares. |
Common stock to be outstanding after this offering | shares (or shares if the underwriters exercise their over-allotment option in full). |
Option to purchase additional shares of common stock | | shares. |
Use of proceeds | We estimate that the net proceeds to us from this offering will be approximately $ million, or $ million if the underwriters exercise their over-allotment option in full, assuming an initial public offering price of $ per share, which is the midpoint of the range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering | |
We intend to | ||
If the net proceeds from this offering exceed $ million, we intend to use a portion of the net proceeds to repay our outstanding convertible notes, in which case, such convertible notes will not convert to shares of |
See "Use of Proceeds." | ||
Voting rights | Holders of our common stock are entitled to one vote per share. See "Description of Capital Stock." |
Dividend policy | We have never declared or paid any cash dividends on our capital stock. We do not intend to pay any dividends in the foreseeable future and currently intend to retain all future earnings to finance our business. See "Dividend Policy." |
| See |
|
Directed share program | At our request, the underwriters have reserved up to % of the shares of common stock offered by this prospectus, for sale, at the initial public offering price, to our employees and directors and to friends, professional contacts and family members of our employees and directors. If purchased by these persons, these shares will not be subject to a lock-up restriction, except in the case of shares purchased by any director or officer, which will be subject to a 180-day lock-up restriction described under "Underwriting." The number of shares available for sale to the general public will be reduced by the number of reserved shares sold to these individuals. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same basis as the other shares offered by this prospectus. See "Underwriting." | |
Common stock listing | We have applied to list our common stock on the |
The number of shares of our common stock that will be outstanding after this offering includes 58,810,113is based on the number of shares of common stock outstanding as of December 31, 2012.June 30, 2020 after giving effect to the Reorganization. Unless otherwise indicated, all information in this prospectus, including the number of shares that will be outstanding after this offering and other share-related information:information, excludes:
excludes 157,948
excludes 1,494,682through the date hereof, at a weighted average exercise price of $ ;
excludes 1,512,878 shares of common stock issuable upon the exercise of options granted to directors, executivesdirectors; and employees on February 16, 2013;
excludes
assumes no exercise of the underwriters’ option to purchase from us up to additional shares to cover over-allotments; and
assumes a for stock split of our common stock to be effected prior to completion of this offering.
See “Executive"Executive and Director Compensation—Stock Option Grants”Grants" and “Executive"Executive and Director Compensation—Director Compensation.”" See also “Description"Description of Capital Stock” beginningStock."
Unless otherwise indicated, all information in this prospectus assumes:
Convertible Notes," based on an initial public offering price of $ per share of common stock, which is the midpoint of the range set forth on the cover page of this prospectus;
SUMMARY CONSOLIDATED FINANCIAL DATA
We prepared the summary consolidated financial data using our consolidated financial statements for each of the periods presented. The summary consolidated financial data for each fiscal year in the three-year period ended December 31, 20122019 was derived from our audited consolidated financial statements appearing elsewhere in this prospectus.
We were formed on February 2, 2011 when The summary consolidated financial data as of and for the six months ended June 30, 2020 and for the six months ended June 30, 2019 was derived from our predecessor, Precious Metals Opportunities LLC, converted to a Delaware corporation. On March 1, 2011, Los Gatos Ltd. merged with and into us.unaudited interim condensed consolidated financial statements appearing elsewhere in this prospectus. In accordance with U.S. generally accepted accounting principles, or U.S. GAAP, allthe opinion of management, such unaudited interim condensed consolidated financial results have been prepared as if the combination of the companies under common control (Precious Metals Opportunities LLC and Los Gatos Ltd.) had occurred prior to the earliest period presented. Accordingly, the financial resultsstatements have been prepared on the following basis:
same basis as the 2010audited consolidated financial statements and reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of our results of operations reflectand financial position. Results as of and for the combined activitiessix months ended June 30, 2020 are not necessarily indicative of Precious Metals Opportunities LLCresults that may be expected for the entire year, and Los Gatos Ltd.; and
the 2011 results of operations reflect the combined activities of Precious Metals Opportunities LLC and Los Gatos Ltd. through February 28, 2011; subsequent to this date, the results of operations reflect the consolidated activities of Sunshine Silver.
As a result of our acquisition of the Sunshine Mine in May 2010, we believe that period-over-period comparisons of our operatinghistorical results are not necessarily meaningful and should notindicative of results that may be relied upon as a good indicator of ourexpected for any future performance.
period. You should read this financial data in conjunction with the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section and our audited consolidated financial statements and related notes included elsewhere in this prospectus. See “Management’s Discussion
| | Year Ended December 31, | Six Months Ended June 30, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2019 | 2018 | 2017 | 2020 | 2019 | |||||||||||
| | | | | (unaudited) | ||||||||||||
| | (in thousands, except for share and per share amounts) | |||||||||||||||
Statement of Loss Data: | ||||||||||||||||
Expenses: | ||||||||||||||||
Exploration | $ | 1,248 | $ | 1,709 | $ | 1,179 | $ | 598 | $ | 527 | ||||||
Pre-development | 2,318 | 2,527 | 2,408 | 1,048 | 1,140 | |||||||||||
General and administrative | 4,845 | 4,396 | 6,494 | 3,257 | 2,689 | |||||||||||
Amortization | 2,370 | 2,307 | 2,483 | 1,203 | 1,238 | |||||||||||
| | | | | | | | | | | | | | | | | |
Total expenses | 10,781 | 10,939 | 12,564 | 6,106 | 5,594 | |||||||||||
Dilution loss on affiliates | 11,231 | — | — | — | 11,231 | |||||||||||
Equity loss in affiliates(1) | 12,865 | 464 | 160 | 21,516 | 311 | |||||||||||
Net other expense | 2,941 | 264 | 87 | 2,343 | 886 | |||||||||||
| | | | | | | | | | | | | | | | | |
Loss before income taxes | 37,818 | 11,667 | 12,811 | 29,965 | 18,022 | |||||||||||
Income tax benefit | — | (3 | ) | — | — | — | ||||||||||
| | | | | | | | | | | | | | | | | |
Net Loss | $ | 37,818 | $ | 11,664 | $ | 12,811 | $ | 29,965 | $ | 18,022 | ||||||
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| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Net loss per share | $ | 0.49 | $ | 0.16 | $ | 0.19 | $ | 0.37 | $ | 0.24 | ||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Weighted average shares outstanding to compute net loss per share | 77,934,044 | 73,941,655 | 67,507,179 | 81,011,188 | 75,050,171 | |||||||||||
Pro forma net loss per share(2) | $ | $ | ||||||||||||||
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| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Weighted average shares outstanding to compute pro forma net loss per share(2) | ||||||||||||||||
| Year ended December 31, | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
(in thousands) | ||||||||||||
Statements of Loss Data: | ||||||||||||
Expenses: | ||||||||||||
Exploration | $ | 19,142 | $ | 19,259 | $ | 14,638 | ||||||
Pre-development | 24,230 | 6,779 | 1,783 | |||||||||
General and administrative | 14,516 | 13,873 | 5,483 | |||||||||
Amortization | 1,938 | 1,372 | 773 | |||||||||
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| |||||||
Total expenses | 59,826 | 41,283 | 22,677 | |||||||||
Net other expense | (230 | ) | 437 | 1,891 | ||||||||
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| |||||||
Loss before income tax benefit | (59,596 | ) | (41,720 | ) | (24,568 | ) | ||||||
Income tax benefit | 14 | — | 30 | |||||||||
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| |||||||
Net loss | $ | (59,582 | ) | $ | (41,720 | ) | $ | (24,538 | ) | |||
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| | Year Ended December 31, | Six Months Ended June 30, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2019 | 2018 | 2017 | 2020 | 2019 | |||||||||||
| | | | | (unaudited) | ||||||||||||
| | (in thousands) | |||||||||||||||
Cash Flow Data: | ||||||||||||||||
Net cash used by operating activities | $ | (12,295 | ) | $ | (6,654 | ) | $ | (8,204 | ) | $ | (9,537 | ) | $ | (4,273 | ) | |
Net cash used by investing activities | (21,905 | ) | (745 | ) | (28,555 | ) | (7,573 | ) | (19,576 | ) | ||||||
Net cash provided by (used by) financing activities | 39,828 | (222 | ) | 42,678 | 9,979 | 25,466 | ||||||||||
| Year ended December 31, | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
(in thousands) | ||||||||||||
Cash Flow Data: | ||||||||||||
Net cash used by operating activities | $ | (53,109 | ) | $ | (36,791 | ) | $ | (21,479 | ) | |||
Net cash used by investing activities | $ | (5,232 | ) | $ | (12,334 | ) | $ | (30,856 | ) | |||
Net cash provided by (used by) financing activities | $ | (840 | ) | $ | 164,661 | $ | 54,592 | |||||
| | June 30, 2020 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | Actual | Pro Forma(1) | Pro Forma As Adjusted(2) | |||||||
| | (in thousands) | |||||||||
Balance Sheet Data: | ||||||||||
Cash and cash equivalents | $ | 1,954 | $ | $ | ||||||
Total assets | 136,147 | |||||||||
Total liabilities | 14,543 | |||||||||
Total shareholders' equity | 121,604 | |||||||||
| December 31, 2012 | ||||||||
| Actual | As Adjusted(1) | |||||||
| (in thousands) | ||||||||
Balance Sheet Data: | ||||||||
Cash and cash equivalents | $ | 59,991 | $ | |||||
Working capital | $ | 61,557 | $ | |||||
Total assets | $ | 109,840 | $ | |||||
Total indebtedness | — | — | ||||||
Total shareholders’ equity | $ | 105,210 | $ | |||||
You should carefully consider the following risk factors that may affect our business, future operating results and financial condition, as well as the other information set forth in this prospectus, before making a decision to invest in our common stock. If any of the following risks actually occurs, our business, financial condition or results of operations would likely be materially and adversely affected. In such case, the trading price of our common stock would likely decline, and you may lose all or part of your investment. The risks below are not the only ones we face. Additional risks not currently known to us or that we currently deem immaterial may also adversely affect us.
Risks Related to Our Business and Industry
We are an exploration company that has nohave a history of negative operating history on which to base an evaluation of our businesscash flows and prospectsnet losses and we cannot provide investors with any assurance that we will generate any operating revenues at our mineral propertiesmay never achieve or ever achieve profitable operations.sustain profitability.
We were formed in December 2009have a history of negative operating cash flows and have not yet generated any operating revenue. The Sunshine Mine has not been a producing mine since 2008, prior to its acquisition by us. We anticipate that we will continue to incur operating costs without realizing any revenues at the Sunshine Mine until at least late 2014 and for the foreseeable future at the Los Gatos Project.net losses. We expect to continue to incur negative operating cash flows and net losses until such time as one or more of our mineral properties enters into commercial production and generates sufficient revenues to fund our continuing operations. IfFor the years ended December 31, 2019 and 2018, our net loss was $37.8 million and $11.7 million, respectively, and for the six months ended June 30, 2020 and 2019, our net loss was $30.0 million and $18.0 million, respectively. For the six months ended June 30, 2019, on a pro forma basis after giving effect to the Reorganization, our net loss would have been $ million. Given our history of negative operating cash flows and net losses, and potential future negative operating cash flows and net losses, we are unablemay use the net proceeds from this offering to generatefund our continuing operations. See "Use of Proceeds."
We may never achieve or sustain profitability. The Cerro Los Gatos Mine commenced production on September 1, 2019. To become and remain profitable, we must succeed in generating significant revenues at the Sunshine Mine or theCerro Los Gatos Project, weMine, which will not be ablerequire us to earn profits or continue operations. We cannot provide investors with any assurance that we will be successful in resuming productiona 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 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.
There is substantial doubt about our ability to continue as a going concern.
Our recurring negative operating cash flows and net losses raise substantial doubt about our ability to continue as a going concern. Our ability to continue operating as a going concern is contingent upon our ability to secure sufficient financing, retire certain existing obligations and/or reduce spending to maintain operations. Based on our planned use of the net proceeds of this offering and our currently available resources, including existing cash and cash equivalents, we estimate that such funds will enable us to fund our projected operating expenses and capital expenditures for at least twelve months from the Sunshine Mine, ordate of this prospectus. This estimate is based on assumptions that may prove to be wrong, and we will ever developcould use our available capital resources sooner than we currently expect. Changing circumstances could cause us to consume capital significantly faster than we currently anticipate, and we may need to spend more than currently expected because of circumstances beyond our control. The financial statements contained elsewhere in this prospectus do not include any adjustments that might result from our inability to continue as a mine at the Los Gatos Project.going concern.
We are dependent on our two principal projects for our future operating revenue,operations, the SunshineCerro Los Gatos Mine property and the Los Gatos Project, neither of whichDistrict. The Los Gatos District (other than the Cerro Los Gatos Mine) does not currently hashave proven or probable mineral reserves.
The Sunshine Mine property and the Los Gatos Project doDistrict (other than the Cerro Los Gatos Mine) does not have identified proven and probable mineral reserves. The costs, timing and complexities of upgrading the mineralized material at the Sunshine Mine property to proven and probable reserves may be greater than we anticipate. Mineral exploration and development involves 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 either the Sunshine Mine property or the Los Gatos ProjectDistrict 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.
Mineralized materialMineral reserve and mineral resource calculations at the SunshineCerro Los Gatos Mine and the Los Gatos ProjectDistrict are only estimates.
Our calculation Calculations of mineral reserves at the Cerro Los Gatos Mine and of the mineralized materialmineral resources at the Sunshine Mine and the Los Gatos ProjectDistrict 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 mineralized material.mineral reserves and mineral resources. Until mineralized material ismineral 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 mineralized materialmineral reserves and mineral resources and grades of mineralization on our properties.
The estimation of mineralized materialmineral 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 mineralized materialmineral 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 mineralized materialmineral reserves and mineral resources estimates. The extent to which mineralized materialmineral 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’sproperty's return on capital. We cannot provide assurance that mineralization can be mined or processed profitably.
Our mineralized material 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.
In addition, inferred mineral resources have a great amount of uncertainty as to their existence and their economic and legal feasibility. You should not assume 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 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 construct mining and processing facilities and obtain the rights to the land and resources required to develop the mining activities.
Development projects have no 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.
Our processing ability may be adversely impacted by certain circumstances.
A number of factors could affect our ability to process the quantities of metals that we recover and our ability to efficiently 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.
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 capital costs to take the Sunshine Mine into production may be significantly higher than those set forth in the Sunshine Mine Technical Report and Preliminary Economic Assessment. We may ultimately base our decisions about the development of the Sunshine Mine on a feasibility study. We have not prepared a feasibility study for the Sunshine Mine, but we may use a portion of the proceeds of the offering to produce one if we deem it necessary or appropriate to do so. Our evaluations of our business and prospects are subject to change, including after any feasibility study has been conducted, which could materially adversely affect our prospects.
Additionally, the actual amount of operating costs at the SunshineCerro Los Gatos Mine 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 operating costs at the SunshineCerro Los Gatos Mine may be significantly higher than those set forth in the Sunshine MineLos Gatos Technical Report and Preliminary Economic Assessment.Report. As a result of higher capital and operating costs, production and economic returns may differ significantly from those set forth in the Sunshine MineLos Gatos Technical Report and Preliminary Economic Assessment and there are no assurances that any future development activities will result in profitable mining operations.
Historical production at the Sunshine Mine may not be indicativeTable of the potential for future development.Contents
There is currently no commercial production at the Sunshine Mine and, since acquiring ownership, we have never recorded any revenues from commercial production at the Sunshine Mine. You should not rely on the fact that there were historical mining operations at the Sunshine Mine as an indication that we will ever have future successful commercial operations at the Sunshine Mine. In order for us to develop new mining operations at the Sunshine Mine, we will be required to incur substantial operating expenses and capital expenditures to refurbish and/or replace existing infrastructure.
Land reclamation and mine closure may be burdensome and costly.
Land reclamation and mine closure requirements are generally imposed on mineral 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’ssite'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’smine'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. Additionally, even if we cease exploration at the Sunshine Mine we will be required to expend cash and other resources to satisfy ongoing care and maintenance obligations at the Sunshine Mine, which obligations include controlling ground water, monitoring and sampling permitted facilities and ultimately reclaiming our tailings impoundment.
We do not have sufficient funds to bring the Sunshine Mine into sustained commercial operation or to develop a mine at the Los Gatos Project, and we expect that we will require additional financing in the future.
We are an exploration company and do not currently have sufficient capital for sustained operations. We expect that the proceeds from this offering will be used to construct a processing plant for silver-bearing concentrate, construct a new refinery and bring the Sunshine Mine to sustained commercial development. We may also use a portion of the proceeds to complete a feasibility study at the Sunshine Mine. In addition, we plan to complete a pre-feasibility study, conduct exploration drilling and initiate a development decline at the Los Gatos Project. However, we do not expect that the funds raised from this offering will be sufficient to develop a mine at the Los Gatos Project. Our future financing needs may be substantial if we encounter unexpected costs or delays in re-commissioning the Sunshine Mine or developing a mine at the Los Gatos Project.
We expect to raise additional funds through equity, debt, joint venture funding or some combination thereof. Access to additional capital may not, however, be available on terms acceptable to us or at all. Failure to obtain sufficient financing may result in the delay or indefinite postponement of exploration, drilling, development or production at the Sunshine Mine or the Los Gatos Project. Furthermore, even if we raise sufficient additional capital, there can be no assurance that we will achieve profitability or positive cash flow. In addition, any future equity offering will further dilute your equity interest in us and any future debt financing will require us to dedicate a portion of our cash flow to payments on indebtedness and will limit our flexibility in planning for or reacting to changes in our business.
If theThe development of one or more of our mineral projects isthat have been, or may in the future be, found to be economically feasible we will be subject to all of the risks associated with establishing new mining operations.
The Los Gatos Technical Report indicates that the Cerro Los Gatos Mine is a profitable silver-zinc-lead project with an estimated 11-year mine life, at modeled metals' prices. If the development of one of our other mineral projects is found to be economically feasible, the development of such developmentprojects will require obtaining permits and financing, and the construction and operation of mines, processing plants and related infrastructure. As a result, we will be subject to all of thecertain risks associated with establishing new mining operations, including:
The costs, timing and complexities of developing ourthe projects 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 start-up. 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 or other contaminants that, when present in high concentrations, can result in penalties or outright rejection of the metals concentrates by the smelters. Silver-bearing concentratessmelters or offtakers. For example, due to the high fluorine content at our Sunshinethe Cerro Los Gatos Mine, are knownit was necessary to contain relatively high percentagesreduce the fluorine content of arsenic and antimony.the concentrate produced at the Cerro Los Gatos Mine by providing additional cleaning stages. Accordingly, we cannot provide assurance that our activities will result in profitable mining operations at ourthe mineral properties.
Our operations involve significant risks and hazards inherent to the mining industry.
Our operations involve the operation of large pieces ofmachines, heavy mobile equipment and drilling and other heavy equipment. Hazards such as fire, explosion, floods, structural collapses,adverse environmental conditions, industrial accidents, labor disputes, unusual or unexpected geological conditions, ground control problems, cave-ins, floodingchanges 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. For example, in February 2012, we had a fire at the Sunshine Mine. The fire was extinguished in March 2012, access to the upper levels was reestablished in April 2012, and access to the lower levels was reestablished in June 2012. Through December 31, 2012, we have incurred $1.55 million of direct costs related to the Sunshine Mine fire. Hazards inherent to the mining industry can 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 mineral properties, and contamination of, or damage to, the environment, and can result in the suspension of our exploration activities and any future development and production activities. While the Company aimswe aim to maintain best safety practices as part of its 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 of failure of underground openings. If we are required to reinforce such openings or take additional actions to prevent such a failure, we could incur additional expenses, and our operations and stated mineral reserves could be negatively affected. We have taken the actions we determined to be
proper in order to maintain the stability of underground openings, but additional action may be required in the future. Unexpected failures or additional requirements to prevent such failures may adversely affect our costs and expose us to health and safety and other liabilities in the event of an accident, and in turn materially and adversely affect the results of our operations and financial condition, as well as potentially have the effect of diminishing our stated mineral reserves.
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.
Deliveries under a sales agreement with Ocean Partners and other customer concentrate sales agreements may be suspended or cancelled by our customers in certain cases.
Under a sales agreement with Ocean Partners USA Inc. ("Ocean Partners") and other customer 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.
The title to some of ourthe mineral properties may be uncertain or defective, thus risking our investment in such properties.
Certain Under the laws of our United StatesMexico, mineral resources belong to the state, and government concessions are required to explore for or exploit mineral reserves. Mineral rights consist of “patented” and “unpatented” mining claims created and maintained in accordance with the U.S. General Mining Law of 1872. Unpatented mining claims are unique U.S. property interests, and are generally considered to be subject to greater title risk than other real property interests because the validity of unpatented mining claims is often uncertain. This uncertainty arises, in part, out of the complex federal and state laws and regulations that supplement the General Mining Law. Also, unpatented mining claims and related rights, including rights to use the surface, are subject to possible challenges by third parties or contestsderive from concessions granted, on a discretionary basis, by the federal government. The validityMinistry of an unpatentedEconomy, pursuant to the Mexican mining claim, in terms of both its location and its maintenance, is dependent on strict compliance with a complex body of federal and state statutory and decisional law. In addition, there are few public records that definitively control the issues of validity and ownership of unpatented mining claims.
The Sunshine Mine property is part of a historic mining district that was established prior to 1900. The history of ownership of the properties comprising the Sunshine Mine property is complex and involves numerous individuals and entities. In addition, title to many of the mineralized veins at the Sunshine Mine property is based on ownership of the patented claims within which those veins have their apex, as under the General Mining Law the owner of a mining claim within which a mineralized vein has its apex owns the so-called “extralateral rights” to that vein as it may extend downward outside the vertical boundaries of the claim. As the vein extends downward, however, its actual location becomes less and less certain. As a result, ownership of these mineralized veins often becomes more a question of geology than of public records. Over the years, because of the age of the districtlaw and the existence of extralateral rights that renderregulations thereunder. While we and the LGJV hold title to the actual minerals beneath any particular claim more uncertain, our predecessors and adjoining landowners entered into several agreements establishing boundary lines between claims, dividing ownership of portions of claims, agreeing tomineral properties in Mexico described in this prospectus, including the sharing of ore produced from mineralized veins within claims, and agreeing to joint exploration and development activities on certain claims. There can beCerro Los Gatos Mine, through these government concessions, there is no assurance that title to the concessions comprising the Cerro Los Gatos Mine or our predecessors successfully consolidatedor the LGJV's other properties at the Sunshine Mine property so that third parties will not make claimsbe challenged or impaired. The Los Gatos concession is held by us subject to our properties or a sharethe terms of some portionan agreement with the original holder of any mineral production in the future or that we have identified every agreement establishing our property rights.
With respect to several of the patented mining claims at the Sunshine Mine property, we own the mineral estate but not the surface estate. Although we expect we would continue the development of the Sunshine Mine as an underground mine, which would not require us to make use of the surface of those patented claims where we do not own the surface estate, as we develop our mine plan for the Sunshineconcession. The Cerro Los Gatos Mine and as that plan changes over time, there can be no assurance that we will not need to useour or the surface of portions of those claims. If that need arises there can be no assurance that the owners of the surface estate of any of those claims will recognize our common law rights or be willing to enter into agreements with us to allow for such surface use.
Additionally, our mineralLGJV's other properties in Mexico may be subject to prior recorded and unrecordedunregistered agreements, transfersinterests or native land claims, and title may be affected by among other things,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, 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 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 District dated as of November 5, 2019, such opinion is not a guarantee of title and such title may be challenged.
We do not currently intend to enter into hedging arrangements with respect to silver and other minerals and our hedging activities, or our decision not to hedge, with respect to our expenses 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.silver and other minerals. As such, we will not be protected from a decline in the price of silver.silver and other minerals. 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. As a result, any significant and sustained appreciation of the Mexican peso 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 a floating rate, 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 cannot assure you 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 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.
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, we do not carryour business interruption insurance relating to
our properties.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. 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 have the potential to disrupt our exploration at our mines and may require us to make additional expenditures to mitigate the impact of such events.
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, we cannot assure you 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.
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 Executive Chairman and
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-person 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.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.
High metalThe prices in recent years have encouraged increased mineral exploration, development and construction activity, which has increased demand for, and cost of, exploration, development and construction services and equipment.
High metal prices in recent years have encouraged increases in mineral exploration, development and construction activities, which has resulted in increased demand for, and cost of, exploration, development and construction services and equipment. There has also been a shortage of skilled workers in the mining industry in recent years particularly with respect to experienced mine construction and mine management personnel. As a result of this shortage, the wages that we are required to pay to our skilled workers have increased. In addition, employee turnover rates in the mining industry have increased as participants in the minerals industry compete for skilled personnel. Increased demand for services and equipment could result in delays if services or equipment cannot be obtained in a timely manner, and may cause scheduling difficulties due to the need to coordinate the availability of services or equipment, any of which could materially increase our project exploration and any future development and/or construction costs.
The price of silver, iszinc and lead are subject to change and a substantial or extended decline in the priceprices of silver, zinc or lead could materially and adversely affect our revenues and the value of our mineral properties.
Our business and financial performance will be significantly affected by fluctuations in the price of silver. The priceprices of silver, iszinc and lead. The prices of silver, zinc and lead are volatile, can fluctuate substantially and isare affected by numerous factors that are beyond our control. Since 2001,January 1, 2019 to August 31, 2020, the LBMA silver price of silver ranged from a low of $4.06$12.01 per ounce in November 2001on March 19, 2020 to a high of $48.44$28.33 per ounce inon August 7, 2020; the LME Official Settlement zinc price ranged from a low of $1,816 per
tonne ($0.82 per pound) on March 24, 2020 to a high of $2,933 per tonne ($1.33 per pound) on April 2011. While1, 2019; the LME Official Settlement lead price ranged from a low of silver has increased significantly in recent years, such price movement is not$1,586 per tonne ($0.72 per pound) on March 24, 2020 to a predictorhigh of the future price of silver, which may decrease significantly as silver prices$2,265 per tonne ($1.03 per pound) on October 29, 2019. Prices are affected by numerous factors beyond our control, including:
lead; and
Additionally, the COVID-19 pandemic and efforts to contain it, including restrictions on travel and other advisories issued may have a significant effect on silver, zinc and lead prices as well as demand. Because we expect to derive the substantial majority of our revenues from sales of silver, zinc and lead, our results of operations and cash flows will fluctuate as the price of silver increasesprices for these metals increase or decreases.decrease. A sustained period of declining silver prices would materially and adversely affect our financial performance, financial position and results of operations.
Changes in the future demand for the silver, zinc and lead we produce could adversely affect our future sales volume and revenues.
Our future revenues 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. Demand for silver is mostly driven by its general perception as a store of value as well as its uses in industrial processes and products, such as batteries, bearings, brazing and soldering, catalysts, electronics and photographic material, and its use by direct consumers, such as for jewelry, silverware and coins. See "Silver Industry Overview." 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 application. Any substitution of these materials may decrease the demand for the silver, zinc and lead we produce. A fall in demand, resulting from economic slow-downs 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.
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 development 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, we and Dowa must jointly approve of 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 stockholders.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 losses and regulatory or legal exposure, and could have a material adverse effect on our cash flows, financial condition or results of operations. Although to date we have not experienced any material losses relating to cyberattacks or other information security breaches, there can be no assurance that we will not incur such losses in the future. Our risk and exposure to these matters cannot be fully mitigated because of, among other things, the evolving nature of these threats. As such threats continue to evolve, we may be required to expend additional resources to modify or enhance any protective measures or to investigate and remediate any security vulnerabilities.
We may be subject to claims and legal proceedings that could materially and adversely impact our financial position, financial performance and results of operations.
We may be subject to claims or legal proceedings covering a wide range of matters that arise in the ordinary course of business activities. These matters may result in litigation or unfavorable
resolution which could materially and adversely impact our financial performance, financial position and results of operations. See “Business—"Business—Legal Proceedings.”"
We are subject to the risk of labor disputes, which could adversely affect our business.
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.
We have debt and may incur further debt in the future, which could adversely affect our financial health, limit our ability to obtain financing in the future and pursue certain business opportunities and reduce the value of your investment.
The LGJV has debt service obligations pursuant to the agreements governing its outstanding debt. As of June 30, 2020, the LGJV had $222.8 million of debt outstanding under a term loan agreement with Dowa, dated July 11, 2017, as amended from time to time (the "Dowa Term Loan") and $60.0 million of debt outstanding under a working capital facility agreement with Dowa, dated May 30, 2019 (the "Los Gatos Working Capital Facility" and, together with the Dowa Term Loan, the "Dowa Debt Agreements"). In connection with entering into the Los Gatos Working Capital Facility, on April 16, 2019, we made a capital contribution to the LGJV of $18.2 million, which was used to repay a portion of another loan that the LGJV had with Dowa (the "MPR Loan") and Dowa agreed to convert the remaining balance under the MPR Loan in exchange for an approximate 18.5% of the equity interest of the LGJV, reducing our ownership in the LGJV to approximately 51.5%. For more information, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Dowa Debt Agreements."
The Dowa Debt Agreements contain certain covenants and restrictions relating to the LGJV's use of the borrowings under such facilities, including: requiring the LGJV to use a substantial portion of funds from operations to make required payments of principal and interest, to retain certain levels of funds in reserve accounts and to accelerate repayment of the Dowa Term Loan for 70% of excess cash flows, as defined in the Dowa Debt Agreements. These covenants and restrictions will 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, changes in the business and the industry in which we operate; place us at a competitive disadvantage compared to our competitors that have less debt; limit our ability to borrow more money for operations 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 interest and principal. If we, as a 70.0% guarantor of the Dowa Term Loan and the Los Gatos Working Capital Facility, or the LGJV are unable to meet debt service obligations in the future, our financial position, financial performance and results of operations may be materially and adversely affected.
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, the purchase agreements entered into in connectionwe seek to maintain partnerships and relationships with local
communities. Notwithstanding our ongoing efforts, local communities and stakeholders can become dissatisfied with our 2011 private placementsactivities 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.
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.
Our business could be adversely affected by the effects of health epidemics, including the recent COVID-19 pandemic, in regions where we conduct our business operations.
Our business could be adversely affected by health epidemics. For example, the outbreak of COVID-19 in the United States, Mexico and elsewhere has created significant business disruption and may adversely affect 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 lock-down 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.
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 response to the order, the LGJV effected a 45-day temporary suspension of all non-essential activities at the Cerro Los Gatos Mine site, which reduced the number of employees and contractors at the site and the Chihuahua corporate office. During the temporary suspension, the LGJV implemented health protocols, allowed most administrative and technical services employees to work remotely, reduced mining and milling, completed project enhancements and finalized a mine plan upon reactivation of mining activities after the temporary suspension.
In late May 2020, the Mexican government designated mining an essential service and allowed mines to resume production, subject to deploying COVID-19 prevention protocols. Our existing COVID-19 protocols exceeded those mandated by the Mexican government and, accordingly, the LGJV reactivated mine development and mining in late May 2020 and hired additional employees. Ore processing resumed in early June 2020. In order to maintain social distancing and best practice protocols, public areas, such as the residential camps' cafeterias, limited the number of personnel. Food service periods were extended with employees assigned specific times for meals. Face masks are required in offices and other public areas. Daily working shift times are staggered to limit the number of employees in changing areas and pre-shift work meetings. Two sterilization tunnels have been installed at the main entry gate and at the entrance to the cafeteria. All individuals entering the Cerro Los Gatos Mine site are subject to a seriesrapid test to screen for COVID-19 and, if an individual tests positive on the rapid test and on a secondary molecular test, the individual will be subject to quarantine protocols and removed from the mine site. In the event of investors, including Liberty Metals & Mining, contained customary indemnification provisions in favoran outbreak of COVID-19 on site, we could determine that a full suspension of our operations is necessary for the safety and protection of the investors.workers.
The COVID-19 pandemic has temporarily affected our financial condition, in part due to the loss of revenue resulting from the 45-day temporary suspension of all non-essential activities at the LGJV's Cerro Los Gatos Mine site and the expenses associated with the development and implementation of
COVID-19 protocols. In addition, as the LGJV reactivated mine development and mining, it implemented a scalable optimized plan with a lower employee complement and with reduced average monthly production rate at 1,750 tpd until September 2020, targeting higher ore grades. This may result in higher per tonne mining, processing and sustaining capital costs than previously anticipated. We intend to ramp up to the 2,500 tpd design capacity beginning in September 2020 with the goal of reaching the 2,500 tpd design capacity in January 2021.
If the Mexican government were to reinstate the suspension order caused by the COVID-19 pandemic, or if all mining activities at the Cerro Los Gatos Mine site were suspended for an undefined period of time, there could be additional costs incurred, production and development delays, cost overruns and operational restart costs. In addition, given that our management travels regularly between Mexico City and the Cerro Los Gatos Mine site, any restrictions on travel within Mexico may adversely affect our management's ability to oversee ongoing mining activities at the Cerro Los Gatos Mine and our ability to achieve our business objectives and milestones.
We may take further actions as may be required by government authorities or as we determine are in the best interests of our employees and business partners. There is no guarantee that we will not experience significant disruptions to or additional closures of some or all of our operations in the future. Such modifications to our business practices may negatively impact productivity, divert resources away from or otherwise disrupt our or the LGJV's business operations and delay and disrupt exploration and production timelines. Any long term closures or suspensions may also result in the loss of personnel or the workforce in general as employees seek employment elsewhere.
While the full impact of this pandemic is unknown at this time, we are closely monitoring the rapid developments of the outbreak and continually assessing the potential impact on our business. Any prolonged disruption of our or the LGJV's operations and closures of facilities would delay our current exploration and production timelines and negatively impact our business, financial condition and results of operations. There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the outbreak is highly uncertain and subject to change. However, the COVID-19 pandemic could have a material adverse effect on our business, financial condition and results of operations and heighten many of our known risks described in this "Risk Factors" section.
Risks Related to Government Regulations and International Operations
The U.S. and Mexican governments,government, as well as state and local governments, extensively regulate mining operations, which imposesimpose 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 the United States and Mexico, including in relation to:
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-consuming and may restrict, delay or prevent commencement or continuation of exploration or production operations. We cannot assure you that we have been or will be at all times in compliance with all applicable laws and regulations. Failure 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. See “Business—"Business—Environmental, Health and Safety Measures.”Matters."
Any new legislation or administrative regulations or new judicial interpretations or administrative enforcement of existing laws and regulations that would further regulate and tax the mining industry may also require us to change operations significantly or incur increased costs. Such changes could have a material adverse effect on our financial performance, financial position and results of operations.
In addition, the operation of our Sunshine Mine in the United States is subject to regulation by the Federal Mine Safety and Health Administration, or the MSHA, under the Federal Mine Safety and Health Act of 1977 and the Occupational Safety and Health Administration, or the OSHA, under the Occupational Safety and Health Act of 1970. MSHA and OSHA inspect the Sunshine Mine on a regular basis and issue various citations and orders when they believe a violation has occurred under the relevant statute. Subsequent to passage of the Mine Improvement and New Emergency Response Act of 2006, the number of violations cited by the MSHA has significantly increased, as have the dollar penalties associated with those citations.
Our The Mexican properties are subject to regulation by the Political Constitution of the Mexican United 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 ourthe 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 the United States or Mexico result in an 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-commence our operations. Any of these actions could have a material adverse effect on our financial performance, financial position and results of operations.
In late March 2020, in response to the COVID-19 pandemic, 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 service and allowed mines to resume production, subject to deploying COVID-19 prevention protocols. However, there is no certainty that the Mexican regulators will not require further limitations on, or even a full shut down of, the operations at the Cerro Los Gatos Mine in connection with COVID-19. The potential costs of complying with these COVID-19 requirements is unknown and could have a material adverse effect on us.
Our Mexican operations are subject to additional political, economic and other uncertainties not generally associated with domesticU.S. operations.
We currently have a significant exploration projecttwo properties in Mexico,Mexico: the Los Gatos Project, along with 19 other exploration properties inDistrict, which the country,LGJV controls, and the Santa Valeria property, which we control. 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:
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 ourthe LGJV's ability to operate in an optimal fashion or at all. Recently, we cancelledall, 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 Niko concession, a Mexican property outside the Los Gatos region, due to ongoing gang violence, and we terminated the project.future, which could adversely affect our business.
Additionally, the The right to export silver-bearing concentrate 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. Furthermore, the United States has recently instituted or proposed other changes in trade policies that include the negotiation or termination of trade agreements, including free trade agreements, economic sanctions on individuals, corporations or countries, and other government regulations affecting trade between the United States and other countries. It may be time-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.
Any of these 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.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 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. For example, we may be required to upgrade our wastewater treatment system in connection with the renewal of our National Pollutant Discharge Elimination System, or NPDES, permit for the Sunshine Mine. In addition, weWe 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. Alternatively, weWe 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. In addition, theThe 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 addition, in regardsregard to the Cerro Los Gatos Mine, the Los Gatos ProjectDistrict 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 road constructionmining, processing, use of explosives, water use and drilling at our El Doctor, Los Gatos, Mina Grandedischarge and Zacatlan projects contingent upon paying annual fees and providing annual reports, which cover the work accomplished on the property,surface disturbance in relation to the Mexican government. We are also preparing a larger scale permit at the Los Gatos Project which requires a detailed environmental assessmentDistrict and impact study for the future possibility of establishing underground access for further exploration. There can be no certainty as to whether, or the terms under which, such permit will be granted. In addition, weSanta Valeria property. We will be required to
apply for corresponding authorizations prior to any production at each of 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, the emission and discharge of materials into the environment, including greenhouse gas emissions, plant and wildlife
protection, remediation of soil and groundwater contamination, reclamation and closure of properties, including tailings and waste impoundments,storage facilities, groundwater quality and availability, and the handling, storage, transport and disposal of wastes and hazardous materials. Pursuant to such requirements, we may be subject to inspections or reviews by governmental authorities. Failure to comply with these environmental requirements may expose us to litigation, fines or other sanctions, including the revocation of permits and suspension of operations. We expect to continue to incur significant capital and other compliance costs related to such requirements. These laws, regulations and permits, and the enforcement and interpretation thereof, change frequently and generally have become more stringent over time. If our noncompliance with such regulations were to result in a release of hazardous materials into the environment, such as soil or groundwater, we could be required to remediate such contamination, which could be costly. Moreover, noncompliance could subject us to private claims for property damage or personal injury based on exposure to hazardous materials or unsafe working conditions. In addition, changes in applicable requirements or stricter interpretation of existing requirements may result in costly compliance requirements or otherwise subject us to future liabilities. The occurrence of any of the foregoing, as well as any new environmental, health and safety laws and regulations applicable to our business or stricter interpretation or enforcement of existing laws and regulations, could have a material adverse effect on our business, financial condition and results of operations.
We could be liable for any environmental contamination at, under or released from our or our predecessors’predecessors' currently or formerly owned or operated properties or third-party waste disposal sites, including the Bunker Hill Superfund Site.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 off-site 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.
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.
Legislation has previously been proposed that would significantly affect the mining industry.We may be responsible for anti-corruption and anti-bribery law violations.
Periodically, members Our operations are governed by, and involve interactions with, various levels of government in foreign countries. We are required to comply with anti-corruption and anti-bribery laws, including the Corruption of Foreign Public Officials Act (Canada) and the U.S. Congress have introduced bills which would supplantForeign Corrupt Practices Act (the "FCPA") and similar laws in Mexico. These laws generally prohibit companies and company employees from engaging in bribery or alterother prohibited payments to foreign officials for the provisionspurpose of obtaining or retaining business. The FCPA 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 FCPA violations.
In recent years, there has been a general increase in both the U.S. General Mining Lawfrequency of 1872, which governsenforcement and the unpatented claimsseverity 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, controlour 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 Sunshine Mine.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 such amendment has become lawor more groups of people may oppose our current and has imposed a moratorium on patentingfuture operations or further development or new development of mining claims, which reduced the security of title provided by unpatented claimsour projects or operations. Such opposition may be directed through legal or administrative proceedings or expressed in manifestations such as thoseprotests, 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 Sunshine Mine property. Other bills have proposed, among other things, to make permanent the patent moratorium, to impose a federal royalty on production from unpatented mining claims and to declare certain lands as unsuitable for mining. If additional legislation is enacted, it could substantially increase the cost of holding unpatented mining claims by requiring payment of royalties, and could significantly impair our ability to develop mineral estimates on unpatented mining claims. Although it is impossible to predict at this time what royalties may be imposed in the future, the imposition of such royalties could adversely affect the potential foroperation or development of, our projects or may require us to enter into agreements with such mining claims. Passagegroups or local governments with respect to our projects, in some cases causing considerable delays to the advancement of such legislation could adversely affect our business.projects.
Risks Related to thisThis Offering and ourOur Common Stock
There is no existing market for our common stock and we do not know if one will develop. Even if a market does develop, the stock price in the market may not exceed the offering price.
Prior to this offering, there has not been a public market for our common stock. We cannot predict the extent to which investor interest in our Company will lead to the development of an active trading market on the
New York Stock Exchange, NYSE, the Toronto Stock ExchangeTSX or otherwise, or how liquid that market may become. An active trading market for our common stock may not develop and even if it does develop, may not continue upon the completion of this offering and the market price of our common stock may decline below the initial public offering price. The initial public offering price for the common stock will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell shares of our common stock at prices equal to or greater than the price you pay in this offering.
The market price of our common stock may be volatile, which could result in substantial losses for you.
The initial public offering price for our common stock will be determined through negotiations between us and the representatives of the underwriters. This initial public offering price may vary from the market price of our common stock after this offering. Some of the factors that may cause the market price of our common stock to fluctuate include:
investors’
In addition, if 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 their shares of common stock and may otherwise negatively affect the liquidity of our common stock. In the past, when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock. If any of our shareholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management from our business.
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–takeoveranti-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 that we will adopt prior to the
closing of this offering will contain several provisions that will apply after Electrum, or any person which is an express assignee or designee of Electrum, ceases to own in the aggregate more than 50% of our outstanding common stock. These provisions 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 provisions include provisions that setsetting forth advance notice procedures for stockholders’shareholders' nominations of directors and proposals of topics for consideration at meetings of stockholders,shareholders, provisions restricting stockholdersshareholders from calling a special meeting of stockholdersshareholders or requiring one to be called, provisions limiting the ability of stockholdersshareholders to act by written consent and provisions requiring a 66 2/3% stockholder66.67% shareholder vote to amend our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws and a staggered board. Our Amended and Restated Certificate of Incorporation will also provide that Section 203 of the Delaware General Corporation Law, or DGCL, which relates to business combinations with interested stockholders, will not apply to us until such time as Electrum ceases to own more than 50% of our outstanding common stock, after which time we will be governed by those provisions.Bylaws. These provisions may delay, prevent or deter a merger, acquisition, tender offer, proxy contest or other transaction that might otherwise result in our stockholdersshareholders 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.
You will suffer immediate and substantial dilution as a result of this offering.
The initial public offering price per share of our common stock is substantially higher than our net tangible book value per share immediately after this offering. As a result, if you purchase shares in this offering, you will pay a price per share that substantially exceeds the book value of our assets after subtracting our liabilities.liabilities, and any additional financing in the future may cause further dilution to our existing shareholders and there can be no assurance that any future additional financing will be on terms that are favorable to us or our shareholders. At an offering price of $ per share, which is the midpoint of the offering price range set forth on the front cover of this prospectus, you will incur immediate and substantial dilution of your investment in the amount of $ per share. See “Dilution.”"Dilution."
Future sales of our common stock after the lock-up period has expired, or the perception that such sales may occur, could depress our common stock price.
After this offering, we will have shares of common stock outstanding.outstanding (or shares of common stock outstanding if the underwriters' over-allotment option is exercised in full). This includes the shares of common stock we are selling in this offering, which may generally be resold in the public market immediately after this offering. We expect that the remaining shares of common stock, representing % of our total outstanding shares of common stock following this offering, will become available for resale in the public market as set forth under the heading “Shares"Shares Eligible for Future Sale.”" All of our directors and executive officers, and the holders of substantially all of our common stock, have signed lock-up agreements for a period of 180 days following the date of this prospectus, subject to extension in the case of an earnings release or material news or a material event relating to us. Morgan StanleyBMO Capital Markets Corp., Goldman Sachs & Co. LLC and RBC Capital Markets, LLC may, in itstheir sole discretion and without notice, release all or any portion of the common stock subject to lock-up agreements. There are no agreements, understandings or intentions, tacit or explicit, to release any of the common stock subject to lock-up agreements prior to the expiration of the lock-up period. 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, and we will enter into a registration rights agreement with substantially all our stockholdersshareholders in connection with this offering. See “Certain"Certain Relationships and Related Party Transactions—Registration Rights Agreement.”" These factors could also make it more difficult for us to raise additional funds through future offerings of our common stock or other securities.
In addition, immediately following this offering, we intend to file a registration statement registering under the United States Securities Act of 1933, or theas amended (the "U.S. Securities Act,Act"), the shares of common stock reserved for issuance in respect of incentive awards to our directors and certain of our employees. This would result in approximately shares of common stock underlying options vested as of the date of this prospectus beingsuch awards becoming available for resale intoin the public markets, after the expiration ofsubject to any applicable lock-up agreements to which substantially all of those shares are subject.agreements.
We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your 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 earnings, if any, to finance our business. The payment of any future dividends, if any, will be determined by our Board of Directors in light of conditions then existing, including our earnings, financial condition and capital requirements, business conditions, corporate law requirements and other factors. See “Dividend"Dividend Policy.”"
Certain non-U.S. investors may be subject to U.S. income tax with respect to gain on dispositionsTable of our common stock if we are or become a U.S. real property holding corporation.Contents
Based on our estimates of the current relative fair market values of our U.S. real property interests and other assets, we believe that we are not currently a U.S. real property holding corporation, or a USRPHC, for U.S. federal income tax purposes. However, both because the determination of the value of our mineral assets is uncertain and requires the use of subjective estimates, and because the relative fair market values of our assets will likely fluctuate over time (based on, for example, the results of the exploration and development of our properties), there can be no assurance that we are not, or will not become, a USRPHC. If we are or have been a USRPHC, certain non-U.S. investors will generally be subject to U.S. federal income tax on gain realized on a sale or other disposition of our common stock. However, for so long as our common stock is regularly traded on an established securities market (such as the New York Stock Exchange), a non-U.S. investor will not recognize taxable gain on a sale of our common stock under the rules applicable to USRPHCs unless the investor actually or constructively owns more than 5% of our common stock at any time during the five-year period ending on the date of disposition or, if shorter, its holding period for our common stock. See “U.S. Federal Tax Considerations for Non-U.S. Holders of Common Stock—Gain on Disposition of Common Stock.”
Electrum, Liberty Metals & MiningMERS and their respective affiliates will continue to have a substantial degree of control over us after this offering, which could delay or prevent a change of corporate control or result in the entrenchment of our management and/or the Board of Directors.
After this offering, Electrum will beneficially own, in the aggregate, approximately % of our outstanding common stock (approximately % if the underwriters’underwriters' over-allotment option is exercised in full). In addition, following this offering Liberty Metals & Miningand assuming no exercise by the underwriters of their over-allotment option, MERS will beneficially own, in the aggregate, approximately % of our outstanding common stock (approximately % if the underwriters’underwriters' over-allotment option is exercised in full). In connection with this offering, we willintend to enter into a stockholdersshareholders agreement with Electrum and Liberty Metals & MiningMERS pursuant to which Electrum and Liberty Metals & MiningMERS will have certain director nomination rights. The stockholders agreementsshareholders agreement will also provide that Electrum approval must be obtained prior to us engaging in certain actions. See “Certain"Certain Relationships and Related Party Transactions—StockholdersShareholders Agreement.”" As a result, Electrum will have the ability to control theour management and affairs of our Company and will have control over the outcome of matters submitted to our stockholdersshareholders for approval, including the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets.
Our concentration of ownership and stockholdersshareholders agreement may harm the market price of our common stock by, among other things:
Our relationship with SOP may strain our senior management resources and could potentially result in conflicts of interest.
Immediately prior to the closing of this offering, we intend to effect the Reorganization. See "Prospectus Summary—Corporate Information and Reorganization." In addition, we intend to enter into a Management Services Agreement with SOP, pursuant to which we will provide certain executive and managerial advisory services to SOP. See "Certain Relationships and Related Party Transactions—Reorganization and Management Services Agreement." SOP will reimburse us for costs representing the proportion of our advisory services allocated to it under the Management Services Agreement. However, providing such advisory services to SOP may strain our resources and divert management's attention from our principal projects and other business concerns, which would adversely affect our business and operating results. We anticipate that at least some of our directors will also be directors of SOP, which could create, or appear to create, conflicts of interest with respect to matters involving both us and SOP.
The requirements of being a public company may strain our resources, divert management’smanagement's attention and affect our ability to attract and retain executive management and qualified board members.members, which could make it difficult to manage our business, particularly after we are no longer an "emerging growth company."
Following the completion of this offering, we will be required to comply with various regulatory and reporting requirements, including those required by the Securities and Exchange Commission (the "SEC"). Complying with these reporting and other regulatory requirements will be time-consuming and
will result in increased costs to us and could have a negative effect on our business, financial condition and results of operations.
As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, the Dodd-Frank Act, applicable Canadian securities laws and regulations, the listing requirements of the New York Stock ExchangeNYSE and the Toronto Stock ExchangeTSX and other applicable securities rules and regulations. Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources, particularly after we are no longer an “emerging"emerging growth company.”" The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal controlcontrols over financial reporting. In order to maintain and, if required, improve the effectiveness of our disclosure controls and procedures and internal controlcontrols over financial reporting to meet this standard, we will need to commit significant resources, hire additional staff and provide additional management oversightoversight. We will be implementing additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies. Sustaining our growth also will require us to commit additional management, operational and financial resources to identify new professionals to join us and to maintain appropriate operational and financial systems to adequately support expansion. These activities may be required. As a result, management’sdivert management's attention may be diverted from other business concerns, which could adversely affect our business and operating results.
For as long as we remain As an “emerging"emerging growth company”company" as defined in the JOBS Act, we mayintend to take advantage of certain temporary 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, 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. When these exemptions cease to apply, we expect to incur additional expenses and devote increased management effort toward ensuring compliance with them. We cannot predict or estimate the amount of additional costs we may take advantageincur as a result of these reporting exemptions until we are no longer an “emerging growth company.”becoming a public company or the timing of such costs.
We will remain an “emerging"emerging growth company” for upcompany" until the earliest of: (i) the last day of the first fiscal year in which our annual gross revenues are $1.07 billion or more; (ii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities; or (iii) the date on which we are deemed to five years, although ifbe a "large accelerated filer," which will occur as of the end of any fiscal year in which we (x) have an aggregate market value of our common stock that is held by non-affiliates exceedsof $700 million as of any June 30 before that time, we would cease to be an “emerging growth company”or more as of the following January 31.last business day of our most recently completed second fiscal quarter, (y) have been required to file annual and quarterly reports under the Exchange Act, for a period of at least 12 months and (z) have filed at least one annual report pursuant to the Exchange Act.
We also expect that being a public company and complying with these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation and nominating committee, and qualified executive officers.
As a result of disclosure of information in this prospectus and in filings required of a public company, our business and financial condition will become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and operating results could be adversely affected, and even if the claims do not
result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business and operating results.
As a result of becoming a public company, we will be obligated to develop and maintain proper and effective internal controlcontrols over financial reporting. We may not complete our analysis of our internal controlcontrols over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may adversely affect investor confidence in our companyus and, as a result, the value of our common stock.
We may be required, pursuant to Section 404 of the Sarbanes–OxleySarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal controlcontrols over financial reporting for the first fiscal year beginning after the effective date of this offering. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal controlcontrols over financial reporting, as well as a statement that our independent registered public accounting firm has issued an opinion on our internal controlcontrols over financial reporting.
We are in the very early stages of the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal controlcontrols over financial reporting, we will be unable to assert that our internal controls are effective.
If we are unable to assert that our internal controlcontrols over financial reporting isare effective, or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which wouldcould cause the price of our common stock to decline, and we may be subject to investigation or sanctions by the SEC.
We will be required to disclose changes made in our internal controlcontrols and procedures on a quarterly basis. However, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal controlcontrols over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act until the later of the year following our first annual report required to be filed with the SEC and the date we are no longer an “emerging"emerging growth company”company" as defined in the JOBS Act, if we take advantage of the exemptions contained in the JOBS Act. At such time, 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 remediation efforts may not enable us to avoid a material weakness in the future. We will remain an “emerging"emerging growth company”company" for up to five years, although if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any before that time, we would cease to be an “emerging growth company” as of the following January 31.years. To comply with the requirements of being a public company, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring additional accounting or internal audit staff.
We are an “emerging"emerging growth company”company" and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.
We are an “emerging"emerging growth company,”" as defined in the JOBS Act, and we mayintend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging"emerging growth companies”companies" including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of 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 this prospectus and 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-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 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 stockholdersshareholders agreement will contain a provision renouncing our interest and expectancy in certain corporate opportunities.
Our Amended and Restated Certificate of Incorporation and stockholdersshareholders agreement provideswill provide for the allocation of certain corporate opportunities between us and Electrum and Liberty Metals & Mining.MERS. Under these provisions, neither Electrum or Liberty Metals & Mining,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 employed by usalso our employee and also serves as a director, officer or employee of Electrum or Liberty Metals & MiningMERS 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 Liberty Metals & MiningMERS to themselves or their subsidiaries or affiliates instead of to us. The terms of our Amended and Restated Certificate of Incorporation are more fully described in “Description"Description of Capital Stock”Stock" and the terms of our stockholdersshareholders agreement are more fully described in “Certain"Certain Relationships and Related Party Transactions—StockholdersShareholders Agreement.”"
Our Amended and Restated Certificate of Incorporation will provide 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 will provide 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:
This provision does not apply to suits brought to enforce a duty or liability created by the Securities Act, the Exchange Act or any other claim for which the U.S. federal courts have exclusive
jurisdiction. Our Amended and Restated Certificate of Incorporation will further provide 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 will also provide 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 to be 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.
We will have broad discretion in the use of the net proceeds from this offering and may not use them effectively.
We currently intend to use the net proceeds from this offering in the manner described in "Use of Proceeds." However, our Board of Directors and management will retain broad discretion in the application, and timing of the application, of the net proceeds from this offering and could spend the net proceeds in ways that do not improve our results of operations or enhance the value of our common stock. As such, we may use net proceeds of this offering in ways that an investor may not consider desirable, if our Board of Directors and management believe such use would be in our best interest. As a result, investors will be relying on the judgment of our Board of Directors and management for the application of the net proceeds from this offering. There can be no assurance regarding the results and the effectiveness of our use of the net proceeds from this offering. Our failure to apply these funds effectively could result in financial losses that could harm our business, cause the market price of our stock to decline, and delay the development of our operations. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value.
If securities or industry analysts downgrade recommendations regardingdo not publish research, or publish inaccurate or unfavorable research, about our stock,business, the price of our common stock and our trading volume of our stock could decline.
The trading market for our common stock will depend, in part, on the research and reports that securities or industry analysts publish about us or our business may vary widelybusiness. Securities and industry analysts do not currently, and may not predict accurate results, but will likely have an affectnever, publish research on our Company. If no or too few securities or industry analysts commence coverage of our Company, the trading price offor our common stock. Ifstock would likely be negatively affected. In the event securities or industry analysts initiate coverage, if one or more of the analysts thatwho cover us downgrade recommendations regarding our common stock or publish inaccurate or unfavorable research about our business, the price of our common stock would likely decline. In addition, if our operating results fail to meet the forecast of operations do not meet their expectations,analysts, the price of our common stock would likely decline. If one or more of these analysts cease coverage of our Company or fail to publish reports on us regularly, demand for our common stock could decrease, which might cause the price could decline rapidlyof our common stock and such decline could be material.trading volume to decline.
SPECIALCAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains “forward-looking"forward-looking statements.”" Those statements include, but are not limited to, statements with respect to our expected costsproduction from the Cerro Los Gatos Mine and timing for the further exploration and development of the Sunshine Mine propertyLos Gatos District, including the repurchase of an 18.5% interest in Big Creek, Idaho (including whetherthe LGJV, a feasibility study willto be completed at the SunshineCerro Los Gatos Mine property) orfor a 3,000 tpd production rate expansion, estimated calculations of mineral reserves and resources at our properties, results of the economic analysis contained in the Los Gatos Project in Mexico (includingTechnical Report, our business strategy, general administrative expenses, the timing for completion of a pre-feasibility study forthe Reorganization, the entry into the Management Service Agreement, payment of royalty payments, production and sale of concentrates, future strategic infrastructure development at the Cerro Los Gatos Esther and Amapola zones of the Los Gatos Project) or of our other prospective properties, estimated calculations of mineralized material at the Sunshine Mine, property, our quality assurance/quality control protocols for our exploration drilling campaign at the Sunshine Mine property, our business strategy, expected cost savings, projected attributable net revenue and unlevered free cash flow, estimates of tax liabilities, our prospects, plans and objectives, industry trends, our requirements for additional capital, expectations generally regarding the completion of the offering, the utilization of the net proceeds of the offering, treatment under applicable government regimes for permitting or attaining approvals, unanticipated reclamation expenses, government regulation, environmental risks, reclamation and rehabilitation expenses, title disputes or claims, synergies of potential future acquisitions, expected actions of third parties, and limitations of insurance coverage.coverage, and our anticipated uses of the net proceeds from this offering. These statements may be under the captions “Prospectus"Prospectus Summary,” “Risk" "Risk Factors,” “Management’s" "Management's Discussion and Analysis of Financial Condition and Results of Operations,” “Silver" "Silver Industry Overview,” “Business”" "Business" and in other sections of this prospectus. In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential”"may," "might," "could," "would," "achieve," "budget," "scheduled," "forecasts," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential" or “continue,”"continue," the negative of these terms and other comparable terminology. These forward-looking statements may include projections of our future financial performance, our anticipated growth strategies and anticipated trends in our industry.
All forward-looking statements speak only as of the date on which they are made. These statements are not guarantees 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. We believe that the factors that could cause our actual results to differ materially from those expressed or implied by forward-looking statements include the following:
evaluation of our business and prospects;
our mineralized materialoperations;
historical production at the Sunshine Mine property may not be indicative of potential future development;
estimates;
land reclamation and mine closure
we will require additional financinguncertain or defective;
exposure to all of the risks associated with establishing new mining operations, if the development of one or more of our mineral projects is found to be economically feasible;
future;
competition within our industry;
title to some of our mineral properties may be uncertain or defective;
our exposure to losses because of our hedging activities or our decision not to hedge;
our insurance may not provide adequate coverage;
our inability to retain key members of management;
increased demand for, and cost of, exploration, development and construction services and equipment in recent years;
changes in the price of silver;
claims and legal proceedings against us;
our Mexican operations are subject to additional political, economic and other uncertainties not generally associated with domestic operations;
other uncertainties not generally associated with domestic operations;
These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements included in this prospectus. 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. We caution you not to place undue reliance 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 prospectus 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.
We will receive net proceeds from this offering of approximately $ million, or approximately $ million if the underwriters exercise their over-allotment option in full, to purchase additional shares, assuming an initial public offering price of $ per share, which is the midpoint of the range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses.expenses payable by us.
A $1.00 increase (decrease) in the assumed initial public offering price of $ per share, which is the midpoint of the range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from thethis offering by approximately $ million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting theestimated underwriting discounts and commissions and estimated offering expenses payable by us. A share increase (decrease) in the number of shares of common stock offered by us would increase (decrease) the net proceeds to us from this offering by $ million, assuming the assumed initial public offering price remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
We intend to allocate the proceeds as follows:
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Repurchase an 18.5% interest in the Los Gatos Joint Venture to increase our ownership to 70.0% | ||||||||
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Our objectives with respect
If the net proceeds from this offering exceed $ million, we intend to use $ of the resource, construct a new mill, refinerynet proceeds to repay our outstanding convertible notes, in which case, such convertible notes will not convert to shares of common stock in connection with this offering. The convertible notes bear interest at 5% per annum and other buildingsmatures on April 19, 2023, unless repaid earlier or converted into our common stock. For more information on the convertible notes, see "Management's Discussion and infrastructure that will produce silver-bearing concentratesAnalysis of Financial Condition and doréResults of Operations—Liquidity and define additional mineralized material.Capital Resources—Convertible Notes."
We may also complete a feasibility study for the Sunshine Mine if we deem it necessary or appropriatecurrently intend to do so. Our objectives with respect to the Los Gatos Project are to begin an exploration decline at the Los Gatos Project, resume exploration and in-fill drilling and complete a pre-feasibility study at the Cerros Los Gatos, Esther and Amapola zones.
While we currently anticipate that we will use the net proceeds offrom this offering asin the manner described above, we may reallocateabove. However, our Board of Directors and management will retain broad discretion in the application, and timing of the application, of the net proceeds from timethis offering and could spend the net proceeds in ways that do not improve our results of operations or enhance the value of our common stock. As a result, investors will be relying on the judgment of our Board of Directors and management for the
application of the net proceeds from this offering. There can be no assurance regarding the results and the effectiveness of our use of the net proceeds from this offering. See "Risk Factors—Risks Related to time depending upon marketThis Offering and other conditionsOur Common Stock—We will have broad discretion in effect at the time.use of the net proceeds from this offering and may not use them effectively." In addition, we have a history of negative operating cash flows and net losses and may continue to have negative operating cash flows and net losses in the future. As a result, we may use the net proceeds from this offering to fund our continuing operations. See "Risk Factors—Risks Related to Our Business and Industry—We have a history of negative operating cash flows and net losses and we may never achieve or sustain profitability." Pending their application,the use of the proceeds from this offering, we intend to invest the net proceeds in a variety of capital preservation instruments, including short-term, interest-bearing, investment gradeinvestment-grade securities or short-term deposits or sharesdeposits. We cannot predict whether the proceeds invested will yield a favorable return.
Table of money market mutual funds.Contents
We have never declared or paid any cash dividends on our capital stock. We do not intend to pay any dividends in the foreseeable future and currently intend to retain all future earnings to finance our business. Any determination to pay dividends to holders of our common stock in the future will be at the discretion of our Board of Directors and will depend upon such factors as our earnings levels, capital requirements, requirements under the DGCL and other factors as our Board of Directors deems relevant.
Under the terms of the Los Gatos Working Capital Facility, we have established an escrow account and entered into an escrow agreement with Dowa in which the LGJV is required to deposit all dividends or distributions, other than management fees and partner expense reimbursements, until an aggregate amount equal to $20 million has been deposited into such account for the benefit of Dowa as a priority dividend. Following the payment of $20 million to Dowa, dividends from LGJV will be paid in accordance with the ownership percentage of the LGJV.
The following table sets forth our cash and cash equivalents and capitalization as of December 31, 2012June 30, 2020:
This table should be read in conjunction with “Management’sthe "Selected Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations”Operations" sections and theour consolidated financial statements and related notes thereto appearingincluded elsewhere in this prospectus. Unless otherwise stated, all dollar amounts expressed below are in thousands, except for per share amounts.
| December 31, 2012 | ||||||||
| Actual | As Adjusted | |||||||
Cash and cash equivalents | $ | 59,991 | $ | |||||
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Stockholders’ equity: | ||||||||
Common Stock, $0.001 par value per share, 100,000,000 shares authorized, actual; shares authorized, as adjusted; 58,810,113 shares issued and outstanding, actual; shares issued and outstanding, as adjusted | $ | 59 | $ | |||||
Paid-in capital | 246,710 | |||||||
Accumulated deficit | (141,559 | ) | ||||||
Unrealized gains on investments, net of tax | — | |||||||
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Total stockholders’ equity | $ | 105,210 | $ | |||||
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Total capitalization | $ | 105,210 | $ | |||||
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| | Actual | Pro Forma(1) | Pro Forma As Adjusted(2) | |||||||
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Cash and cash equivalents | $ | 1,954 | $ | $ | ||||||
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Shareholders' equity | ||||||||||
Common stock, $0.001 par value; 100,000,000 shares authorized; 80,646,832 shares outstanding, actual; shares outstanding, pro forma; shares outstanding, pro forma as adjusted | 80 | |||||||||
Paid-in capital | 378,099 | |||||||||
Accumulated deficit | (255,548 | ) | ||||||||
Treasury stock, at cost, 289,177 shares, actual; shares, pro forma; shares, pro forma as adjusted | (1,027 | ) | ||||||||
Total shareholders' equity | 121,604 | |||||||||
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Total capitalization | $ | 121,604 | $ | $ | ||||||
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The table above does not include:
157,948 A share increase (decrease) in the number of shares of common stock issuable uponoffered by us would increase (decrease) pro forma as adjusted cash and cash equivalents, total shareholders' equity and total capitalization by $ million, assuming the exerciseassumed initial public offering price remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
1,494,682 shares of common stock issuable upon the exercise of options granted to directors, executives and employees on October 30, 2012;
1,512,878 shares of common stock issuable upon the exercise of options granted to directors, executives and employees on February 16, 2013; and
additional shares of common stock reserved for further issuance under our stock option plans.
See “Executive and Director Compensation—Stock Option Grants” and “Executive and Director Compensation—Director Compensation.”
Our consolidated net tangible book value as of December 31, 2012June 30, 2020 was $( )$121.6 million or $( )$1.51 per share of common stock. Consolidated net tangible book value per share represents consolidated tangible assets, less consolidated liabilities, divided by the aggregate number of shares of common stock outstanding.
After giving effect to (i) the Reorganization, (ii) the issuance of an aggregate of shares of common stock to our executive officers in connection with this offering and (iii) the conversion of our outstanding convertible notes into an aggregate of shares of common stock in connection with this offering, our pro forma consolidated net tangible book value as of June 30, 2020 was $ million or $ per share of common stock. Pro forma consolidated net tangible book value per share represents pro forma consolidated tangible assets, less pro forma consolidated liabilities, divided by the aggregate number of shares of common stock outstanding.
After giving further effect to the issuance and sale by us of the shares of common stock in this offering at anthe assumed initial public offering price of $ per share, which is the midpoint of the range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted consolidated net tangible book value as of December 31, 2012June 30, 2020 would have been $ million or $ per share.share of common stock. This represents an immediate increase in pro forma consolidated net tangible book value to existing stockholdersshareholders of $ per share and an immediate dilution to new investors purchasing shares in this offering of $ per share. Dilution per share represents the difference between the price per share to be paid by new investors for the shares of common stock sold in this offering and the pro forma consolidated net tangible book value per share immediately after this offering.
The following table illustrates this per share dilution:
Assumed initial public offering price | $ | ||||||
Consolidated net tangible book value per share as of June 30, 2020 | $ | 1.51 | |||||
Increase in consolidated net tangible book value per share attributable to pro forma adjustments | |||||||
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Pro forma consolidated net tangible book value per share as of June 30, 2020 | |||||||
Increase in consolidated pro forma net tangible book value per share attributable to new investors | |||||||
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Pro forma as adjusted consolidated net tangible book value per share as of June 30, 2020 | |||||||
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Dilution per share to new investors | $ | ||||||
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The dilution information discussed above is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing. A $1.00 increase (decrease) in the assumed initial public offering price of $ per share, (thewhich is the midpoint of the range set forth on the cover page of this prospectus),prospectus, would increase (decrease) our pro forma as adjusted consolidated net tangible book value per share after this offering by $ per share and the dilution per share to new investors purchasing shares in this offering by $ ,per share, in each case assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. A share increase (decrease) in the number of shares of common stock offered by us would increase (decrease) pro forma as adjusted consolidated net tangible book value per share by $ per share and dilution per share to new investors purchasing shares in this offering by $ per share, in each case assuming the assumed initial public offering price remains the same and after
deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
If the underwriters’underwriters' over-allotment option to purchase common stock is exercised in full, our pro forma as adjusted consolidated net tangible book value per share after giving effect to this offering would be $ , and the dilution per share in net tangible book value to new investors purchasing shares in this offering would be $ .
The following table sets forth, as of December 31, 2012,June 30, 2020, after giving effect to (i) the Reorganization, (ii) the issuance of an aggregate of shares of common stock to our executive officers in connection with this offering and (iii) the conversion of our outstanding convertible notes into an aggregate of shares of common stock in connection with this offering, the number of shares of common stock purchased from the Company,us, the total consideration paid, or to be paid, to the Companyus and the average price per share paid, or to be paid, by existing stockholdersshareholders and by new investors purchasing shares in this offering, at anthe assumed initial public offering price of $ per share, which is the midpoint of the range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and offering expenses payable by the Company:prospectus:
| | Shares Purchased | Total Consideration | | |||||||||||||
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| | Number (in thousands) | Percent | Amount (in thousands) | Percent | Average Price Per Share | |||||||||||
Existing shareholders | % | $ | % | $ | ||||||||||||
New investors | $ | |||||||||||||||
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Total | 100 | % | $ | 100 | % | |||||||||||
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| Shares Purchased | Total Consideration | Average Price Per Share | ||||||||||||||||
| Number | Percent | Amount | Percent | |||||||||||||||
Existing stockholders | % | $ | % | $ | ||||||||||||||
New investors | ||||||||||||||||||
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If the underwriters’underwriters' over-allotment option to purchase common stock is exercised in full, the number of shares of common stock held by existing stockholdersshareholders would decrease to % of the total number of shares of common stock outstanding after this offering, and the number of shares of common stock held by new investors would increase to % of the total number of shares of common stock outstanding after this offering.
A $1.00 increase (decrease) in the assumed initial public offering price of $ per share (the midpoint of the range set forth on the cover page of this prospectus) would increase (decrease) total consideration paid by new investors, total consideration paid by all stockholders and average price per share paid by all stockholders by $ million, $ million and $ , respectively, in each case assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.
The foregoing tables exclude 157,948 shares of common stock issuable upon the exercise of options granted in 2009; 1,494,682 shares of common stock issuable upon the exercise of options granted to directors, executives and employees on October 30, 2012; and 1,512,878 shares of common stock issuable upon the exercise of options granted to directors, executives and employees on February 16, 2013. See “Executive and Director Compensation—Stock Option Grants” and “Executive and Director Compensation—Director Compensation.” To the extent thesethat any outstanding options are exercised, new options are issued under our share-based compensation plans and are exercised, outstanding DSUs are converted to common stock, new DSUs are issued and are converted to common stock or we issue additional common stock in the future, there will be further dilution to new investors.investors purchasing shares in this offering.
SELECTED CONSOLIDATED FINANCIAL DATA
We prepared the selected consolidated financial data using our consolidated financial statements for each of the periods presented. The selected consolidated financial data for each fiscal year in the three-year period ended December 31, 20122019 and the balance sheet data as of December 31, 20122019 and 20112018 was derived from our audited consolidated financial statements appearing elsewhere in this prospectus.
We were formed on February 2, 2011 when The selected consolidated financial data as of and for the six months ended June 30, 2020 and for the six months ended June 30, 2019 was derived from our predecessor, Precious Metals Opportunities LLC, converted to a Delaware corporation. On March 1, 2011, Los Gatos Ltd. merged with and into us.unaudited interim condensed consolidated financial statements appearing elsewhere in this prospectus. In accordance with U.S. GAAP, allthe opinion of management, such unaudited interim condensed consolidated financial results have been prepared as if the combination of the companies under common control (Precious Metals Opportunities LLC and Los Gatos Ltd.) had occurred prior to the earliest period presented. Accordingly, the financial resultsstatements have been prepared on the following basis:
same basis as the 2010audited consolidated financial statements and reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of our results of operations reflectand financial position. Results as of and for the combined activitiessix months ended June 30, 2020 are not necessarily indicative of Precious Metals Opportunities LLCresults that may be expected for the entire year, and Los Gatos Ltd.; and
the 2011 results of operations reflect the combined activities of Precious Metals Opportunities LLC and Los Gatos Ltd. through February 28, 2011; subsequent to this date, the results of operations reflect the consolidated activities of Sunshine Silver.
As a result of our acquisition of the Sunshine Mine in May 2010, we believe that period-over-period comparisons of our operatinghistorical results are not necessarily meaningful and should notindicative of results that may be relied upon as a good indicator of ourexpected for any future performance.
period. You should read this financial data in conjunction with the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section and our audited consolidated financial statements and related notes included elsewhere in this prospectus. See “Management’s Discussion
| | Year Ended December 31, | Six Months Ended June 30, | ||||||||||||||
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| | 2019 | 2018 | 2017 | 2020 | 2019 | |||||||||||
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Statement of Loss Data: | ||||||||||||||||
Expenses: | ||||||||||||||||
Exploration | $ | 1,248 | $ | 1,709 | $ | 1,179 | $ | 598 | $ | 527 | ||||||
Pre-development | 2,318 | 2,527 | 2,408 | 1,048 | 1,140 | |||||||||||
General and administrative | 4,845 | 4,396 | 6,494 | 3,257 | 2,689 | |||||||||||
Amortization | 2,370 | 2,307 | 2,483 | 1,203 | 1,238 | |||||||||||
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Total expenses | 10,781 | 10,939 | 12,564 | 6,106 | 5,594 | |||||||||||
Dilution loss on affiliates | 11,231 | — | — | — | 11,231 | |||||||||||
Equity loss in affiliates(1) | 12,865 | 464 | 160 | 21,516 | 311 | |||||||||||
Net other expense | 2,941 | 264 | 87 | 2,343 | 886 | |||||||||||
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Loss before income taxes | 37,818 | 11,667 | 12,811 | 29,965 | 18,022 | |||||||||||
Income tax benefit | — | (3 | ) | — | — | — | ||||||||||
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Net Loss | $ | 37,818 | $ | 11,664 | $ | 12,811 | $ | 29,965 | $ | 18,022 | ||||||
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Net loss per share | $ | 0.49 | $ | 0.16 | $ | 0.19 | $ | 0.37 | $ | 0.24 | ||||||
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Weighted average shares outstanding to compute net loss per share | 77,934,044 | 73,941,655 | 67,507,179 | 81,011,188 | 75,050,171 | |||||||||||
Pro forma net loss per share(2) | $ | $ | ||||||||||||||
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| | 2019 | 2018 | 2017 | 2020 | 2019 | |||||||||||
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Cash Flow Data: | ||||||||||||||||
Net cash used by operating activities | $ | (12,295 | ) | $ | (6,654 | ) | $ | (8,204 | ) | $ | (9,537 | ) | $ | (4,273 | ) | |
Net cash used by investing activities | (21,905 | ) | (745 | ) | (28,555 | ) | (7,573 | ) | (19,576 | ) | ||||||
Net cash provided by (used by) financing activities | 39,828 | (222 | ) | 42,678 | 9,979 | 25,466 | ||||||||||
| | December 31, 2019 | December 31, 2018 | June 30, 2020 | |||||||
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Balance Sheet Data: | ||||||||||
Cash and cash equivalents | $ | 9,085 | $ | 3,457 | $ | 1,954 | ||||
Total assets | 154,295 | 146,561 | 136,147 | |||||||
Total liabilities | 4,904 | 3,509 | 14,543 | |||||||
Total shareholders' equity | 149,391 | 143,052 | 121,604 | |||||||
| Year ended December 31, | Period from April 24, 2006 (Inception) to December 31, 2012 | ||||||||||||||||||||||
| 2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||||||
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Statements of Loss Data: | ||||||||||||||||||||||||
Expenses: | ||||||||||||||||||||||||
Exploration | $ | 19,142 | $ | 19,259 | $ | 14,638 | $ | 9,765 | $ | 2,718 | $ | 65,930 | ||||||||||||
Pre-development | 24,230 | 6,779 | 1,783 | — | — | 33,543 | ||||||||||||||||||
General and administrative | 14,516 | 13,873 | 5,483 | 818 | 415 | 35,296 | ||||||||||||||||||
Amortization | 1,938 | 1,372 | 773 | 6 | — | 4,090 | ||||||||||||||||||
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Total expenses | 59,826 | 41,283 | 22,677 | 10,589 | 3,133 | 138,859 | ||||||||||||||||||
Net other expense | (230 | ) | 437 | 1,891 | 597 | 24 | 2,744 | |||||||||||||||||
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Loss before income tax benefit | (59,596 | ) | (41,720 | ) | (24,568 | ) | (11,186 | ) | (3,157 | ) | (141,603 | ) | ||||||||||||
Income tax benefit | 14 | — | 30 | — | — | 44 | ||||||||||||||||||
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Net loss | (59,582 | ) | $ | (41,720 | ) | $ | (24,538 | ) | $ | (11,186 | ) | $ | (3,157 | ) | $ | (141,559 | ) | |||||||
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Basic and diluted net loss per share | $ | (1.01 | ) | |||||||||||||||||||||
Pro-forma basic and diluted net loss per share | $ | (0.75 | ) | $ | (0.74 | ) | $ | (2.06 | ) | $ | (16.95 | ) | ||||||||||||
Cash Flow Data: | ||||||||||||||||||||||||
Net cash used by operating activities | $ | (53,109 | ) | $ | (36,791 | ) | $ | (21,479 | ) | $ | (10,876 | ) | $ | (2,866 | ) | $ | (126,662 | ) | ||||||
Net cash used by investing activities | $ | (5,232 | ) | $ | (12,334 | ) | $ | (30,856 | ) | $ | (31 | ) | $ | (4 | ) | $ | (48,458 | ) | ||||||
Net cash provided by (used by) financing activities | $ | (840 | ) | $ | 164,661 | $ | 54,592 | $ | 11,885 | $ | 3,250 | $ | 235,111 | |||||||||||
(in thousands) Balance Sheet Data: Cash and cash equivalents Working capital Total assets Related-party debt Total shareholders’ equity (deficit) December 31, 2012 2011 2010 2009 2008 $ 59,991 $ 119,172 $ 3,636 $ 1,379 $ 401 $ 61,557 $ 119,651 $ 4,485 $ 1,689 $ (241 ) $ 109,840 $ 166,370 $ 36,076 $ 2,610 $ 709 — — $ 31,000 $ 15,990 $ 4,298 $ 105,210 $ 159,745 $ 2,663 $ (14,270 ) $ (4,533 )
MANAGEMENT’SMANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Our historical financial data discussed below reflects our historical financial condition and results of operations, which do not give effect to the Reorganization. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. The following discussion and analysis contains forward-looking statements that reflect our plans, estimates and beliefs. These forward-looking statements involve risks and uncertainties. You should review “Risk Factors”"Risk Factors" and “Special"Cautionary Note Regarding Forward-Looking Statements”Statements" for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by these forward-looking statements.
Unless otherwise stated, all dollar amounts expressed below are in thousands, except for share and per share amounts.Overview
Overview
Sunshine Silver Mines Corporation is We are a U.S.-based precious metals explorationproduction, development and developmentexploration company with the objective of becoming a premier silver producer. We are currently focused on the advancementproduction and continued development of our two principal projects:the Cerro Los Gatos Mine and the further exploration and development of the Los Gatos District:
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We were formed on February 2, 2011 when our predecessor, Precious Metals Opportunities LLC, converted to a Delaware corporation. On March 1, 2011, Los Gatos Ltd. merged with and into us. Prior to the merger, Los Gatos Ltd. eliminated all of its outstanding related-party debt through the issuance of preferred shares, which were subsequently exchanged for shares of our common stock in connection with the merger. In connection with the merger, outstanding ordinary shares of Los Gatos Ltd. and options to purchase ordinary shares of Los Gatos Ltd. were also converted into shares of our common stock and options to purchase shares of our common stock, respectively. The assets and liabilities of each predecessor company are presented at historical cost as this transaction was reported for accounting purposes as a combination of companies (Los Gatos Ltd. and Precious Metals Opportunities LLC) under common control. In accordance with U.S. GAAP, common control exists between the predecessor Sunshine and Los Gatos entities as both entities were primarily owned by certain trusts under the control of one individual. In accordance with U.S. GAAP, all financial reports have been prepared as if the combination of the companies under common control had occurred prior to the earliest period presented.
Our entire source of funds to date has been proceeds from financing activities. From March 1, 2011 to June 1, 2011, we received proceeds of $163,733 through private placements of our common stock to investors. We have not received any additional funding subsequent to June 1, 2011.
We have not yet generated any operating revenue. We anticipate that we will continue to incur significant operating costs without realizing any revenues at the Sunshine Mine until at least late 2014 or the Los Gatos
Project for the foreseeable future. We believe that the anticipated net proceeds from this offering and our existing cash and cash equivalents will provide adequate funds for ongoing operations, further exploration in the United States and Mexico, planned capital expenditures and working capital to fund mine development, a new processing facility for commercial production of silver-bearing concentrate and a new refinery to bring the Sunshine Mine into sustained commercial production. However, we may elect to seek additional funding prior to bringing the Sunshine Mine into sustained commercial production. We expect that we will require additional funds at a later date to develop a mine at the Los Gatos Project, which depending upon the circumstances may be in the form of equity, 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.
Principal Projects
Sunshine Mine
The Sunshine Mine is located within the Coeur d’Alene Mining District in Idaho. In May 2010, we acquired from Sterling the majority of the operating facilities and equipment at the Sunshine Mine, including a lease on the Sunshine Mine that included a purchase option for title to the Sunshine Mine. In July 2010, we closed the purchase option in the lease to obtain title to the Sunshine Mine and acquired the remaining operating facilities and equipment. The total consideration paid in cash was comprised of (i) $23,500 for the net assets acquired and liabilities assumed and (ii) $5,750 for the right, title and interest acquired in connection with the purchase option. Our consolidated land position at the Sunshine Mine property consists of approximately 3,901 hectares.
We are undertaking significant exploration and re-development of the Sunshine Mine property. Since acquiring the Sunshine Mine, we have successfully completed or are currently working on the following significant exploration and re-development activities at the Sunshine Mine property:
acquired additional surface rights;
repaired surface facilities and equipment, including the Jewell shaft hoists, compressed air, water and pumping systems;
ongoing repairs to the Jewell shaft;
commissioned the Silver Summit hoist and completed work to enable rehabilitation of the Silver Summit shaft;
re-established utility services to the Sunshine Mine ramp, enabling commencement of improvements required for ventilation and re-access to mining blocks;
completed a drill hole database review for areas of immediate exploration and began compiling the entire historical geologic database to create a three dimensional model of the resources;
designed a new development plan to re-establish access in the upper and lower mine levels for exploration and development;
completed an independent technical report in accordance with NI 43-101 and the requirements of Industry Guide 7;
completed an NI 43-101 compliant preliminary economic assessment to determine the costs to re-commission and operate the Sunshine Mine as a sustainable and efficient silver producer;
defined additional mineralized material through surface and underground exploration;
advanced the excavation of the Sterling Tunnel decline to access upper level mineralized blocks for future mining; and
completed repairs and improvements to the Silver Summit headframe and Consil adit.
Our objectives at the Sunshine Mine property through 2013 and 2014 are to:
continue to define additional mineralized material through expanded surface and underground exploration;
complete the upgrading of the Jewell shaft;
upgrade the Silver Summit shaft to provide a secondary access to certain underground levels;
complete a feasibility study if we deem it necessary or appropriate to do so;
develop sufficient stope access to return the mine to production;
commence mining in the upper portions of the mine;
complete the construction of a new modern ore processing facility that will produce silver-bearing concentrates; and
upgrade other existing infrastructure and re-establish access to developed portions of the resource.
The Sunshine Mine property will require significant time and capital before this property returns to full-capacity production.
In February 2012, air monitoring equipment detected an underground fire at the 3100 level of the Sunshine Mine. All mine personnel were safely evacuated, and the federal Mine Safety and Health Administration was notified. The fire was extinguished in March 2012, access to the upper levels of the mine was reestablished in April 2012 and access to the lower levels of the mine was reestablished in June 2012. Subsequent to regaining access to the lower levels of the mine, we determined that the fire did not enter the main shafts or cause any significant damage to the infrastructure of the Sunshine Mine. As a result, we believe the fire will not significantly impact our refurbishment activities or future mine operations. Through December 31, 2012, we have incurred $1,550 of direct costs related to the remediation of the Sunshine Mine fire. We do not expect to incur any significant additional cost related to the fire remediation.
Los Gatos Project
The Los Gatos Project is located approximately 120 kilometers south of the state capital of Chihuahua City in Northern Mexico and to date,is comprised of a 103,087-hectare land position, constituting a new mining district. The Los Gatos District consists of 14 mineralized zones, which include three identified silver discoveries, silver-lead-zinc deposits that contain mineral resources—the Cerro Los Gatos Mine, the Esther deposit and the Amapola zones,deposit—as well as 11 additional high-priority targets defined by high-grade drill intersections and 10 other priority targets over 100150 kilometers of outcropping quartz and calcite veins. The area is characterized by a predominant silver-lead-zinc epithermal mineralization.
Prior to our initial acquisition of exploration concession rights in 2006, very limited historical prospecting and exploration activities had been conducted at On September 1, 2019, the Los Gatos Project. We were able to acquire concessions covering approximately 149,083 hectares, and through our exploration, we have discovered a virgin silver region containing high-grade epithermal vein style mineralization throughout our Los Gatos concession package.
In 2008, we negotiated surface access rights with local ranch owners and obtained environmental permits for drilling. Environmental baseline data collection (climate, water, vegetation, air and social) began in May 2010 in anticipation of future development activities at the Los Gatos Project. Geological work continued with detailed surface mapping, sampling and prospecting of new zones. In 2011 and 2012, we acquired additional surface access rights to continue and expand our drilling activities at the Los Gatos Project. Data on flora, fauna, water, air, climate, security and social impacts are generally collected on a regular basis and we intend to integrate this data into future social, environmental and technical studies for the Los Gatos Project.
To date, our primary areas of focus have been defining and extending mineralization along the Cerro Los Gatos, Esther and Amapola zones. The Cerro Los Gatos zone extends more than 2,500 meters along strike. The Esther zone extends more than 800 meters along strike. The Amapola zone extends more than 2,000 meters
along strike and remains open along strike in both directions. As of August 2012, we have completed 345 drill holes in the Los Gatos Project totaling 160,445 meters.
In 2012, we completed an independent technical report in accordance with NI 43-101 and the requirements of Industry Guide 7 for the combined Cerro Los Gatos, Esther and Amapola zones.
Our objectives at the Los Gatos Project through 2013 and 2014 are to:
expand our exploration drilling program;
conduct social, environmental and technical work on the property with the objective of completing a pre-feasibility study on the Cerro Los Gatos, Esther and Amapola zones;
perform additional in-fill drilling to further define mineralizationLGJV commenced production at the Cerro Los Gatos Esther and Amapola zones; and
acquire additionalMine. A core component of the LGJV's business plan is to explore the highly prospective, mineral and surface rights.
Theunderexplored Los Gatos Project will require significant timeDistrict with the objective of identifying additional mineral deposits that can be mined and capital beforeprocessed, possibly utilizing the Project is brought into production.
Achievement of our objectives at the Sunshine Mine property and theCerro Los Gatos Project is subject to a numberMine plant infrastructure.
Exploration Expenses
We conduct exploration activities under mining concessions in Mexico. Historically, we also conducted exploration activities on patented and unpatented mining claims in the United States, and under mining concessionswhich will be conducted in Mexico.the future by SOP following the Reorganization. We expect our exploration expenses to increase significantly as we continue to expand our exploration activities at the Sunshine Mine property, the Los Gatos ProjectDistrict and our other exploration properties. As access to the underground platforms at the Sunshine Mine is achieved, our exploration drilling costs will further increase. Our exploration expenses primarily consist of drilling costs, lease concession payments, assay costs and other geological and support costs at the Sunshine Mine property, the Los Gatos Project and our other exploration properties.
Pre-development Expenses
Our pre-development expenses primarily relate to mining infrastructure improvements preliminary economic assessment and scoping studies and care and maintenance activities.activities at the Sunshine Complex. Our mining infrastructure improvement expenses include shaft repair, decline excavation and other underground development costs. Our care and maintenance expenses include facility and surface repair, utility costs and mine-dewatering costscosts. Pre-development activities at the Sunshine Mine.Complex will be conducted in the future by SOP following the Reorganization.
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 prepare to 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-relatedshareholder-related fees, directorsdirectors' and officers’officers' and other insurance costs, and other administrative costs. Immediately prior to the completion of this offering, we intend to enter into a Management Services Agreement with SOP, pursuant to which we will provide certain executive and managerial advisory services to SOP. SOP will reimburse us for costs of providing such services. See "Certain Relationships and Related Party Transactions—Reorganization and Management Services Agreement."
In May 2011, we opened a corporate officeEquity Loss in Denver, Colorado, moved many advisory and shared-service functions performedAffiliates
Our equity loss in New Yorkaffiliates relates to Denver, and began establishing a senior executive team primarily based in
Denver. We expect higher costs Our LGJV arrangement fee consists of arrangement fees related to compensationthe Dowa Term Loan and benefits, rentthe Los Gatos Working Capital Facility. The arrangement fees are based on a fixed 2% and occupancy,15% interest rates for the Dowa Term Loan and other administrative costs as we continue to add tothe Los Gatos Working Capital Facility, respectively, and 70% of the outstanding principal of the respective facility. These arrangement fees are solely our senior executive team and hire additional corporate employees. Additionally, we expect to incur higher costs from equity-based compensation plans.responsibility.
As we have incurred substantial losses from our exploration and pre-development activities, we may receive further benefits in the form of deferred tax assets that can reduce our future income tax liabilities, if it is more likely than not that the benefit will be realized before expiration. WeHistorically, we have not recognized these potential benefits in our financial 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. At December 31, 2012,In connection with the Reorganization, we recorded a full valuation allowanceexpect to use approximately $7,100 thousand of $58,463 against these net deferred tax assets. In addition, dueassets to our net losses since inception, we have not paid income taxes to date and therefore there has been no impact on ouroffset federal income tax expenseliability.
Table of operating as a Delaware corporation compared toContents
Exploration activities are conducted on the legal structures of our predecessor entities.
Royalties
We conductLos Gatos District mining concessions in Mexico. Historically, exploration activities were conducted on patented and unpatented mining claims atin the Sunshine Mine propertyUnited States, which will be conducted in the future by SOP following the Reorganization. Mineral and under mining concessions at the Los Gatos Project. Weconcession lease payments are required to make mineral and concession lease paymentsbe paid to various entities to secure the appropriate claims or surface rights. For the fiscal year ended December 31, 2012, we paid $474 for such royalties. Certain of these agreements also have royalty payments that arewere triggered when we beginbegan producing and selling metal-bearing concentrate. As we are not in production, there are currently no instances where we are paying any royalty based upon production and sales. See “Business—The Sunshine Mine Property—Royalties,” “Business—"Business—The Los Gatos Project—District—Location of the Los Gatos Project”District and note 6Access" and Note 4 to our December 31, 20122019 audited consolidated financial statements.
As a result of our acquisition of the Sunshine Mine in May 2010, we believe that period-over-period comparisons of our operating results are not meaningful and should not be relied upon as a good indicator of our future performance. Prior to our acquisition of the Sunshine Mine in May 2010, our operating results were derived solely from the activities of Los Gatos Ltd. and Precious Metals Opportunities LLC. We commenced activities at the Sunshine Mine after our purchase of the Sunshine Mine net assets out of bankruptcy from Sterling in May 2010. This acquisition was accounted for as a business combination and the Company applied purchase accounting to the assets acquired and liabilities assumed.
Results of Operations
The following table presents certain information relating to our operating results for the six months ended June 30, 2020 and 2019 and the years ended December 31, 2012, 20112019, 2018 and 2010.2017. In accordance with generally accepted accounting principles in the United States ("U.S. GAAP, allGAAP"), these financial reports have been prepared as ifstatements represent the combination of the companies under common control occurred prior to the earliest period presented. Accordingly, theconsolidated financial results have been prepared on the following basis:
the 2010position and results of operations reflectof our Company and its subsidiaries (in thousands except for shares and per share data).
| | Year Ended December 31, | Six Months Ended June 30, | ||||||||||||||
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| | 2019 | 2018 | 2017 | 2020 | 2019 | |||||||||||
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Expenses: | ||||||||||||||||
Exploration | $ | 1,248 | $ | 1,709 | $ | 1,179 | $ | 598 | $ | 527 | ||||||
Pre-development | 2,318 | 2,527 | 2,408 | 1,048 | 1,140 | |||||||||||
General and administrative | 4,845 | 4,396 | 6,494 | 3,257 | 2,689 | |||||||||||
Amortization | 2,370 | 2,307 | 2,483 | 1,203 | 1,238 | |||||||||||
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Total expenses | 10,781 | 10,939 | 12,564 | 6,106 | 5,594 | |||||||||||
Other (income) expense: | ||||||||||||||||
Dilution loss on affiliates | 11,231 | — | — | — | 11,231 | |||||||||||
Equity loss in affiliates | 12,865 | 464 | 160 | 21,516 | 311 | |||||||||||
LGJV arrangement fee | 2,988 | 283 | — | 2,285 | 895 | |||||||||||
Other (income) expense | (47 | ) | (19 | ) | 87 | 58 | (9 | ) | ||||||||
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Net other expense | 27,037 | 728 | 247 | 23,859 | 12,428 | |||||||||||
Loss before income taxes | 37,818 | 11,667 | 12,811 | 29,965 | 18,022 | |||||||||||
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Income tax benefit | — | (3 | ) | — | — | — | ||||||||||
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Net loss | 37,818 | 11,664 | 12,811 | 29,965 | 18,022 | |||||||||||
Other comprehensive (income) loss: | ||||||||||||||||
Unrealized (gain) loss on securities, net of tax | (32 | ) | (5 | ) | 25 | — | 5 | |||||||||
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Comprehensive loss | $ | 37,786 | $ | 11,659 | $ | 12,836 | $ | 29,965 | $ | 18,027 | ||||||
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Net loss per share: Basic and diluted | $ | 0.49 | $ | 0.16 | $ | 0.19 | $ | 0.37 | $ | 0.24 | ||||||
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Weighted average shares outstanding: | ||||||||||||||||
Basic and diluted | 77,934,044 | 73,941,655 | 67,507,179 | 81,011,188 | 75,050,171 | |||||||||||
Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
For the combined activitiessix months ended June 30, 2020, we experienced a net loss of Precious Metals Opportunities LLC$29,965 thousand compared to a net loss of $18,022 thousand for the six months ended June 30, 2019. The $11,943 thousand increase in net loss was primarily attributable to the following:
On a pro forma basis after giving effect to the 2011 results of operations reflectReorganization, for the combined activities of Precious Metals Opportunities LLCsix months ended June 30, 2020, exploration expenses would have been $382 thousand; general and Los Gatos Ltd. through February 28, 2011; subsequent to this date, the results of operations reflect the consolidated activities of Sunshine Silver.
| Year Ended December 31, | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
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Statements of Loss Data: | ||||||||||||
Expenses: | ||||||||||||
Exploration | $ | 19,142 | $ | 19,259 | $ | 14,638 | ||||||
Pre-development | 24,230 | 6,779 | 1,783 | |||||||||
General and administrative | 14,516 | 13,873 | 5,483 | |||||||||
Amortization | 1,938 | 1,372 | 773 | |||||||||
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Total expenses | 59,826 | 41,283 | 22,677 | |||||||||
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Other (income) expense: | ||||||||||||
Interest expense | — | 198 | 1,887 | |||||||||
Interest and other income | 23 | (36 | ) | (36 | ) | |||||||
Foreign exchange (gain) / loss | (253 | ) | 275 | 40 | ||||||||
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Net other (income) / expense | (230 | ) | 437 | 1,891 | ||||||||
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Loss before income taxes | (59,596 | ) | (41,720 | ) | (24,568 | ) | ||||||
Income tax benefit | 14 | — | 30 | |||||||||
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Net Loss | $ | (59,582 | ) | $ | (41,720 | ) | $ | (24,538 | ) | |||
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Financial information relating toadministrative expenses would have been $2,380 thousand and other expense would have been $23,861 thousand. Our net loss would have been $26,640 thousand, and our segments is as follows:net loss per share would have been $ .
| Year Ended December 31, 2012 | Year Ended December 31, 2011 | |||||||||||||||||||||||||||||||
| U.S. | Mexico | Corporate | Total | U.S. | Mexico | Corporate | Total | |||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||
Exploration expenses | $ | 5,276 | $ | 13,866 | $ | — | $ | 19,142 | $ | 2,183 | $ | 17,023 | $ | 53 | $ | 19,259 | ||||||||||||||||
Pre-development expenses | 22,043 | 2,187 | — | 24,230 | 6,247 | 532 | — | 6,779 | ||||||||||||||||||||||||
General and administrative expenses | 3,214 | 523 | 10,779 | 14,516 | 3,614 | 823 | 9,436 | 13,873 | ||||||||||||||||||||||||
Amortization | 1,744 | 55 | 139 | 1,938 | 1,280 | 23 | 69 | 1,372 | ||||||||||||||||||||||||
Net other (income)/expense | 54 | (284 | ) | — | (230 | ) | (35 | ) | 472 | — | 437 | |||||||||||||||||||||
Related-party debt | — | — | — | — | ||||||||||||||||||||||||||||
Capital expenditures | 1,754 | 3,315 | 679 | 5,748 | 3,043 | 8,818 | 491 | 12,352 | ||||||||||||||||||||||||
Total assets | 33,593 | 14,242 | 62,005 | 109,840 | 37,023 | 16,367 | 112,980 | 166,370 | ||||||||||||||||||||||||
| Year Ended December 31, 2010 | ||||||||||||||||||||||||||||||||
| U.S. | Mexico | Corporate | Total | |||||||||||||||||||||||||||||
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Exploration expenses | $ | 205 | $ | 14,433 | $ | — | $ | 14,638 | ||||||||||||||||||||||||
Pre-development expenses | 1,783 | — | — | 1,783 | ||||||||||||||||||||||||||||
General and administrative expenses | 3,929 | 1,326 | 228 | 5,483 | ||||||||||||||||||||||||||||
Amortization expenses | 760 | 13 | — | 773 | ||||||||||||||||||||||||||||
Net other (income)/expense | (7 | ) | 1,898 | — | 1,891 | |||||||||||||||||||||||||||
Related-party debt | — | 31,000 | — | 31,000 | ||||||||||||||||||||||||||||
Capital expenditures | 29,464 | 1,366 | — | 30,830 | ||||||||||||||||||||||||||||
Total assets | 31,090 | 4,986 | — | 36,076 | ||||||||||||||||||||||||||||
Year Ended December 31, 20122019 Compared to Year Ended December 31, 20112018
For the year ended December 31, 2012,2019, we experienced a net loss of $59,582$37,818 thousand compared to a net loss of $41,720$11,664 thousand for the year ended December 31, 2011.2018. The $17,862$26,154 thousand increase in net loss is duewas primarily attributable to increases in pre-development and, to a lesser extent, general and administrative expenses. The primary reasons for the change are as follows:following:
Pre-development expense increased by $17,451 to $24,230$1,248 thousand for the year ended December 31, 20122019, compared to $6,779$1,709 thousand for the year ended December 31, 2011. The increase is2018, due to significant underground mining infrastructure improvements atreduced efforts on concessions outside of the Sunshine Mine that commencedLGJV district resulting in November 2011.
lower labor costs and Mexico concessions holding costs.
LGJV for management services provided.
On a reduction in interest expensepro forma basis after giving effect to the Reorganization, for the year ended December 31, 2012 (due to the conversion2019, exploration expenses would have been $923 thousand; general and administrative expenses would have been $2,865 thousand and other expense would have been $27,047 thousand. Our net loss would have been $30,869 thousand and our net loss per share would have been $ .
Year Ended December 31, 20112018 Compared to Year Ended December 31, 20102017
For the year ended December 31, 2011,2018, we experienced a net loss of $41,720$11,664 thousand compared to a net loss of $24,538$12,811 thousand for the year ended December 31, 2010.2017. The $17,182 increase$1,147 thousand decrease in net loss iswas primarily attributable to the following:
Explorationyear ended December 31, 2018, compared to $6,494 thousand for the year ended December 31, 2017, primarily due to higher management fees charged to the LGJV.
Pre-development expense increased $4,996 to $6,779 in 2011 compared to $1,783 in 2010 primarily due to the May 2010 acquisition of the Sunshine Mine, an increase in employees to support the additional pre-development activities in 2011, and the commencement of mining infrastructure improvements in late 2011.
General and administrative expense increased $8,390 to $13,873 in 2011 compared to $5,483 in 2010. The increase was primarily due to our establishment of a corporate office in May 2011, legal, accounting and consulting costs to execute our merger with Los Gatos Ltd., raise additional equity financing and prepare for our initial public offering, offset by our acquisition of the Sunshine Mine in May 2010.
Amortization expense increased $599 to $1,372 in 2011 compared to $773 in 2010 primarily due to the May 2010 acquisition of the Sunshine Mine.
Other expense decreased $1,454 to $437 in 2011 compared to $1,891 in 2010 primarily due to a reduction in interest expense in 2011. In January 2011, all of the outstanding related-party debt was converted into preferred shares of Los Gatos Ltd.
2018.
Liquidity and Capital Resources
As of June 30, 2020, and December 31, 2012,2019, we had cash and cash equivalents of $59,991$1,954 thousand and $9,085 thousand, respectively, and working capital of $61,557 compared to$2,405 thousand and $14,990 thousand, respectively. The decrease in cash and cash equivalents of $119,172 and working capital of $119,651 as of December 31, 2011. This decrease was primarily due to a net lossincreased investment in the LGJV, increased related-party receivables and other operation needs, partially offset by an increase in related-party convertible notes.
For the six months ended June 30, 2020, we borrowed $10,000 thousand by issuing related-party convertible notes and the notes remain outstanding as of $59,582 for the year ended December 31, 2012.
June 30, 2020. We did not have any related-party debt as of December 31, 2012 and2019. As of June 30, 2020, we could borrow an additional $5,000 thousand by issuing convertible notes under the Convertible Note Purchase Agreement (as defined herein).
We did not have any related-party debt as of December 31, 2011. In January 2011, all of the $31,000 of related-party debt was converted into preferred shares of Los Gatos Ltd. Pursuant to our merger with Los Gatos Ltd., all Los Gatos Ltd. ordinary and preferred shares were converted into shares of our common stock.2019. We have no outstanding lines of credit or other bank financing arrangementsarrangements. We guarantee 70.0% of the Dowa Term Loan and do not anticipate additional future funding fromthe Los Gatos Working Capital Facility as of June 30, 2020. We have certain arrangement fee obligations related parties.
Our entire source of funds to date has beenthe Cerro Los Gatos Mine as detailed in the "LGJV Arrangement Fee" above. In 2019, we received $40,465 thousand in equity proceeds from financing activities. From inception through December 31, 2012,our shareholders. In May 2019, we contributed $18,200 thousand to an LGJV entity to provide funding for a partial repayment of principal and interest related to the MPR Loan. In late May 2019, the MPR Loan was fully extinguished with a cash payment of $18,200 thousand and the conversion of the remaining $50,737 thousand of principal and interest to Dowa equity. The conversion of the remaining principal and interest increased Dowa's ownership in the LGJV entities to 48.5%. As of June 30, 2020, the approximate ownership of the LGJV entities is 51.5% in favor of the Company and 48.5% in favor of Dowa. Due to the LGJV ownership dilution, we recognized a dilution loss on affiliates of $11,231 thousand in May 2019. We have received net proceedsan option to repurchase the approximate 18.5% equity interest in the LGJV from Dowa by June 30, 2021, and only after the Los Gatos Working Capital Facility is repaid, for a total consideration of $235,111 from these financing activities.approximately $51,100 thousand and all costs incurred by Dowa in connection with its ownership of such equity interest, including, but not limited to, legal and accounting fees, capital contributions and taxes.
We believe that, upon the anticipated net proceeds fromcompletion of this offering, and our existingwe will have sufficient cash and cash equivalentsresources 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 provide adequate fundslikely 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 ongoing operations, further explorationfinancing in the United States and Mexico,advance of planned capital expenditures and working capitalexpenditures. In addition, we expect to allowcontinue to increase our current financial resources with external financings as long as our long-term business needs require us to fund mine development, a new processing facility for commercial productiondo so. We manage liquidity risk through the management of silver-bearing concentrates and a new refineryour capital structure.
We may be required to bringprovide funds to the Sunshine Mine into sustained commercial production. However, we may electLGJV to seek additional funding prior to bringing the Sunshine Mine into sustained commercial production. We expect that we will require additional funds at a later date to develop a minesupport operations at the Cerro Los Gatos Project,Mine 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.
Dowa Debt Agreements
On January 1, 2015, we entered into a joint venture with Dowa to develop the LGJV. Dowa initially acquired a 30% interest in the LGJV and the right to purchase future zinc-concentrate production at market rates.
Dowa Term Loan
On July 11, 2017, we entered into a loan agreement (the "Dowa Term Loan") with Dowa whereby the LGJV could borrow up to $210,000 thousand to finance the development of the Los Gatos project. The principal amount of the Dowa Term Loan accrues interest daily at a rate of LIBOR plus 2.35%, and the interest was added to the amount borrowed until production commenced at the Los Gatos project. The LGJV is 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. The maturity date for the Dowa Term Loan is two business days prior to December 31, 2027. The LGJV can prepay the loan from time to time, subject to a minimum amount. We guarantee 70.0% of the Dowa Term Loan. The Dowa Term Loan contains affirmative and negative covenants reasonably customary for similar facilities, with which the LGJV is in compliance in all material respects as of the date of this prospectus.
Los Gatos Working Capital Facility
On April 16, 2019, we entered into a memorandum of understanding with the LGJV and Dowa, whereby we made a capital contribution to the LGJV in the amount of $18,200 thousand in consideration for partial repayment of a previously existing loan with Dowa of $65,678 thousand entered into with Dowa as of January 23, 2018 (the "MPR Loan"). Under the terms of the memorandum, Dowa agreed to convert the remaining balance of $42,937 thousand outstanding under the MPR Loan in exchange for approximately 18.5% of the equity interests in the LGJV. This diluted our ownership in the LGJV to approximately 51.5%, with Dowa owning the remaining approximate 48.5%. Furthermore, the LGJV will be required to contribute dividend payments to an escrow account until an aggregate amount equal to $20,000 thousand has been deposited into the account, which is payable to Dowa as a priority dividend, as described in a priority distribution agreement dated May 30, 2019 among us, MPR, OSJ and Dowa. See "Business—The Los Gatos District—Priority Distribution Agreement." Following payment of $20,000 thousand to Dowa, dividends will be paid in accordance with the ownership of the LGJV. Under this memorandum of understanding and the terms of an option agreement dated May 30, 2019 among us, MPR, OSJ and Dowa, Dowa granted us an option to repurchase the approximate 18.5% equity interest in the LGJV from Dowa by June 30, 2021, and only after the Los Gatos Working Capital Facility is repaid, for a total consideration of approximately $51,100 thousand and all costs incurred by Dowa in connection with its ownership of such equity interest, including, but not limited to, legal and accounting fees, capital contributions and taxes. See "Business—The Los Gatos District—Option Agreement." If we do not exercise our option by June 30, 2021, the option will expire and cease to have any further effect, after which Dowa may sell all or a
portion of the interest to a third party. As part of the memorandum of understanding, we entered into a working capital facility agreement dated May 30, 2019, with the LGJV and Dowa (the "Los Gatos Working Capital Facility"), under which Dowa agreed to provide a maximum of $60,000 thousand for the benefit of the LGJV. The interest under the Los Gatos Working Capital Facility is LIBOR plus 3%. We also guarantee 70% of this facility and are 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 during the relevant fiscal quarter. The Los Gatos Working Capital Facility contains affirmative and negative covenants reasonably customary for similar facilities, with which the LGJV is in compliance in all material respects as of the date of this prospectus. All principal amounts outstanding under the Los Gatos Working Capital Facility will be due on or before June 28, 2021. The full principal amount of the Los Gatos Working Capital Facility has been drawn down by the LGJV.
Convertible Notes
On April 20, 2020, we entered into a Convertible Note Purchase Agreement with Electrum Silver US LLC (as amended, the "Convertible Note Purchase Agreement"). Pursuant to the Convertible Note Purchase Agreement, we may issue and sell to Electrum Silver US LLC from time to time, convertible notes on the same terms under the Convertible Note Purchase Agreement until the earlier of (i) such time as the aggregate principal amount of principal indebtedness evidenced by all convertible notes issued and sold under the Convertible Note Purchase Agreement equals $15,000 thousand and (ii) April 20, 2021. Upon the consummation of a sale of equity securities in a bona fide equity financing, including this offering, that results in gross proceeds to us of at least $10,000 thousand from investors not affiliated with Electrum, the convertible notes, including any accrued but unpaid interest, may, at our option, (i) convert into shares of such equity securities at a price per share equal to the lesser of (A) 80% of the price per share of such equity securities and (B) $7.50 per share of such equity securities, subject to adjustment for any stock split (including as part of the Reorganization), stock dividend, reverse stock split, recapitalization or similar transactions, or (ii) be repaid in full. The outstanding principal amount of the convertible notes and any accrued but unpaid interest is due and payable on April 19, 2023. However, any conversion of the convertible notes into equity securities as described above shall be deemed a repayment of the convertible notes so converted. The convertible notes bear interest at a rate of 5.00% per annum, compounding annually. As of the date of this prospectus, we have issued $ thousand aggregate principal amount of convertible notes and there is $ thousand in accrued but unpaid interest.
The following table presents our sources and uses of cash for the periods indicated:
| | Year Ended December 31, | Six Months Ended June 30, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2019 | 2018 | 2017 | 2020 | 2019 | |||||||||||
| | | | | (unaudited) | ||||||||||||
| | (in thousands) | | | |||||||||||||
Net cash provided by (used by) | ||||||||||||||||
Operating activities | $ | (12,295 | ) | $ | (6,654 | ) | $ | (8,204 | ) | $ | (9,537 | ) | $ | (4,273 | ) | |
Investing activities | (21,905 | ) | (745 | ) | (28,555 | ) | (7,573 | ) | (19,576 | ) | ||||||
Financing activities | 39,828 | (222 | ) | 42,678 | 9,979 | 25,466 | ||||||||||
| | | | | | | | | | | | | | | | | |
Total change in cash | $ | 5,628 | $ | (7,621 | ) | $ | 5,919 | $ | (7,131 | ) | $ | 1,617 | ||||
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
(in thousands) | ||||||||||||
Net cash provided by (used by) | ||||||||||||
Operating activities | $ | (53,109 | ) | $ | (36,791 | ) | $ | (21,479 | ) | |||
Investing activities | (5,232 | ) | (12,334 | ) | (30,856 | ) | ||||||
Financing activities | (840 | ) | 164,661 | 54,592 | ||||||||
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Total change in cash | $ | (59,181 | ) | $ | 115,536 | $ | 2,257 | |||||
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Cash used by operating activities was $53,109, $36,791$9,537 thousand and $21,479$4,273 thousand for the six months ended June 30, 2020 and 2019, respectively. The $5,264 thousand increase was primarily due to an increase in related party receivables from the LGJV and net loss, after non-cash adjustments for equity
loss in affiliates and stock-based compensation expense. Cash used by operating activities was $12,295 thousand, $6,654 thousand and $8,204 thousand for the years ended December 31, 2012, 20112019, 2018 and 2010,2017, respectively. The increases$5,641 thousand increase between 2012, 2011December 31, 2019 and 2010 wereDecember 31, 2018 was primarily attributeddue to increasesan increase in related party receivables from the LGJV. The $1,550 thousand decrease between December 31, 2018 and December 31, 2017 was primarily due to a decrease in net losses and changes in working capital, partially offset by higher stock compensation and amortization expense in 2012.loss.
Cash used by investing activities was $5,232, $12,334$7,573 thousand and $30,856$19,576 thousand for the six months ended June 30, 2020 and 2019, respectively. The $12,003 thousand decrease was primarily due to the $18,200 investment in the LGJV in 2019, offset by the $7,573 thousand investment in the LGJV in 2020. Cash used by investing activities was $21,905 thousand, $745 thousand and $28,555 thousand for the years ended December 2012, 201131, 2019, 2018 and 2010,2017, respectively. The decrease in 2012 compared to 2011 is$21,160 thousand increase between December 31, 2019 and December 31, 2018 was primarily due to our reduced purchases of landthe $21,371 thousand investment in the LGJV. The $27,810 thousand decrease between December 31, 2018 and equipmentDecember 31, 2017 primarily reflects the $28,225 thousand investment in 2012, compared to our purchases of land, mineral rights and equipment during 2011. The decreasethe LGJV in 2011 compared to 2010 is primarily due to our purchase of land, mineral rights and equipment during 2011, compared to our purchase of the Sunshine Mine in 2010.2017.
Cash used by financing activities was $840 for the year ended December, 2012. The cash used by financing activities in 2012 is due to our payment of deferred financing costs related to the ongoing pursuit of an initial public offering. Cash provided by financing activities was $164,661$9,979 thousand and $54,592$25,466 thousand for the six months ended June 30, 2020 and 2019, respectively. The $15,487 thousand decrease was primarily due to the $25,466 thousand sales of common stock in 2019, partially offset by the $10,000 thousand increase in convertible notes in 2020. Cash provided (used) by financing activities was $39,828 thousand, $(222) thousand and $42,678 thousand for the years ended
December 31, 20112019, 2018 and 2010,2017, respectively. The cashCash provided by financing activities in 2011 is primarily duerelates to sales of common stock as comparedand convertible notes. Cash used in financing activities primarily relates to 2010 capital contributionstreasury stock purchases.
The following table presents certain information relating to LGJV's financial condition and related-party debt fundingoperating results for the years ended December 31, 2019 and 2018 and for the three-year period ended December 31, 2019. In accordance with U.S. GAAP, these financial statements represent the combined financial position and results of $18,500.
Cash dividends are not expected to be paid in the foreseeable future. See “Dividend Policy.”
Contractual Obligations
LGJV. As of December 31, 2012,2018 and 2017, our ownership of the LGJV was 70.0%. In connection with the extinguishment of the MPR Loan on May 30, 2019, our current ownership of the LGJV is approximately 51.5%.
LOS GATOS JOINT VENTURE
COMBINED BALANCE SHEETS
(in thousands)
| | As of December 31, | ||||||
|---|---|---|---|---|---|---|---|
| | 2019 | 2018 | |||||
ASSETS | |||||||
Current Assets | |||||||
Cash and cash equivalents | $ | 1,302 | $ | 11,231 | |||
Receivables | 5,655 | — | |||||
Inventories | 11,374 | 1,886 | |||||
VAT receivable | 50,184 | 30,853 | |||||
Restricted cash | — | 2,219 | |||||
Other current assets | 1,672 | 6,747 | |||||
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Total current assets | 70,187 | 52,936 | |||||
Non-Current Assets | |||||||
Mine development, net | 182,602 | 99,994 | |||||
Deferred financing costs | — | 76 | |||||
Property, plant and equipment, net | 216,131 | 150,763 | |||||
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Total non-current assets | 398,733 | 250,833 | |||||
Total Assets | $ | 468,920 | $ | 303,769 | |||
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LIABILITIES AND OWNERS' CAPITAL | |||||||
Current Liabilities | |||||||
Accounts payable and other accrued liabilities | $ | 43,287 | $ | 16,697 | |||
Dowa MPR Loan | — | 65,670 | |||||
Related party payable | 6,875 | 1,377 | |||||
Accrued interest | 885 | 2,692 | |||||
Equipment loans | 6,948 | 5,227 | |||||
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Total current liabilities | 57,995 | 91,663 | |||||
Non-Current Liabilities | |||||||
Dowa Term Loan | 217,796 | 132,066 | |||||
Working Capital Facility | 60,000 | — | |||||
Equipment loans | 12,916 | 13,494 | |||||
Reclamation obligations | 11,314 | 10,524 | |||||
| | | | | | | | |
Total non-current liabilities | 302,026 | 156,084 | |||||
Owners' Capital | |||||||
Capital contributions | 237,905 | 168,967 | |||||
Paid-in capital | 7,400 | 1,358 | |||||
Accumulated deficit | (136,406 | ) | (114,303 | ) | |||
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Total owners' capital | 108,899 | 56,022 | |||||
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Total Liabilities and Owners' Capital | $ | 468,920 | $ | 303,769 | |||
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LOS GATOS JOINT VENTURE COMBINED
STATEMENTS OF LOSS
(in thousands)
| | Year Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2019 | 2018 | 2017 | |||||||
Sales | $ | 36,508 | $ | — | $ | — | ||||
Operating expenses | ||||||||||
Cost of sales | 30,339 | — | — | |||||||
Royalties | 184 | — | — | |||||||
Exploration | 208 | — | — | |||||||
General and administrative | 2,587 | 83 | 116 | |||||||
Accretion expense | 789 | 9 | 17 | |||||||
Depreciation, depletion and amortization | 15,460 | — | — | |||||||
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Total operating expenses | 49,567 | 92 | 133 | |||||||
Other expense | ||||||||||
Interest expense, net of capitalization | 5,107 | — | — | |||||||
Arrangement fee | 3,524 | — | — | |||||||
Other expense (income) | 239 | (53 | ) | (11 | ) | |||||
Foreign exchange loss | 174 | 623 | 112 | |||||||
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Net other expense | 9,044 | 570 | 101 | |||||||
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Net loss | $ | 22,103 | $ | 662 | $ | 234 | ||||
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At December 31, 2019 and 2018, the LGJV had current assets of $70,187 thousand and $52,936 thousand, respectively. The increase in total current assets was primarily due to an increase in value added tax and trade receivables, partially offset by decreases in cash and other current assets. At December 31, 2019 and 2018, the LGJV had noncurrent assets of $398,733 thousand and $250,833 thousand, respectively. The increase in noncurrent assets was primarily due to increased mine development assets and property, plant and equipment to develop new mining areas and complete site infrastructure, partially offset by accumulated depletion and depreciation that began in 2019.
At December 31, 2019 and 2018, the LGJV had current liabilities of $57,995 thousand and $91,663 thousand, respectively. The decrease in current liabilities was primarily due to the extinguishment of the Dowa MPR Loan, partially offset by an increase in accounts payable and accrued liabilities. At December 31, 2019 and 2018, the LGJV had noncurrent liabilities of $302,026 thousand and $156,084 thousand, respectively. The increase in non-current liabilities was primarily due to an increase in borrowings under the Dowa Term Loan and the Working Capital Facility.
For the year ended December 31, 2019, the LGJV had a $22,103 thousand net loss compared to a $662 thousand net loss for the year ended December 31, 2018. The increase in net loss was primarily due to the start and ramp up of production in 2019, as well as beginning to depreciate the assets placed in service and to expense interest and arrangement fees costs upon achieving production. Interest and arrangement fee costs were capitalized during the construction period. For the year ended December 31, 2018, the LGJV had a $662 thousand net loss compared to a $234 thousand net loss for the year ended December 31, 2017. The increase in net loss was primarily due to foreign exchange losses as the Mexican peso declined in value relative to the U.S. dollar reporting currency.
As of December 31, 2019, we had the following contractual obligations:
| | Payments due by period (in thousands) | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Total | Less than 1 year | 1 - 3 years | 4 - 5 years | More than 5 years | |||||||||||
Reclamation and remediation obligations(1) | $ | 1,836 | $ | — | $ | — | $ | 1,836 | $ | — | ||||||
Mineral leases, concessions and agreements obligations(2)(3) | 470 | 322 | 50 | 34 | 64 | |||||||||||
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Total contractual obligations | $ | 2,306 | $ | 322 | $ | 50 | $ | 1,870 | $ | 64 | ||||||
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In addition, we entered into commitments with federal and state agencies to lease surface and mineral rights. These leases are renewable annually.
| Payments due by period | ||||||||||||||||||||
Contractual Obligations | Total | Less than 1 year | 1-3 years | 4-5 years | More than 5 years | |||||||||||||||
Corporate office lease obligation | $ | 531 | $ | 112 | $ | 229 | $ | 190 | $ | — | ||||||||||
Reclamation and remediation obligations | 1,836 | — | — | — | 1,836 | |||||||||||||||
Advance royalty payments(1)(2)(3) | 23,046 | 745 | 1,427 | 5,991 | 14,883 | |||||||||||||||
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Total | $ | 25,413 | $ | 857 | $ | 1,656 | $ | 6,181 | $ | 16,719 | ||||||||||
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We recognize all employee and director stock-based compensation as a cost in our consolidated financial statements. Equity-classified awards are measured at the grant date fair value of the award. We estimate the grant date fair value using the Black-Scholes option-pricing model using estimated amounts for volatility of our stock, the expected life of the awards, the fair value of the underlying shares, the risk-free interest rate and the expected dividend yield. The related expense is included as a component of either exploration, pre-development or general and administrative expenses over the requisite service period of the award.
Our stock-based compensation includes DSUs granted to certain employees and directors, and stock options granted to employees, directors and various individuals and entities.
In 2018, we granted 10,000 stock options at a strike price of $4.50 per share. In 2019, we granted 1,203,000 stock options at a strike price of $6.00 per share. During the six months ended June 30, 2020, we granted 1,596,667 stock options at a strike price of $6.00 per share.
The total stock-based compensation expense incurred for the years ended December 31, 2019, 2018 and 2017 was $3,219 thousand, $2,392 thousand and $1,981 thousand, respectively. The total stock-based compensation expense incurred for the six months ended June 30, 2020 was $2,118 thousand.
The following table sets forth stock option grant information from January 1, 2017 through June 30, 2020:
Grant Date | Options Granted | Exercise Price | |||||
|---|---|---|---|---|---|---|---|
2017(1)(2)(3) | 2,181,250 | $ | 4.50 | ||||
2018(4) | 10,000 | $ | 4.50 | ||||
2019(5) | 1,203,000 | $ | 6.00 | ||||
2020(6)(7)(8) | 1,596,667 | $ | 6.00 | ||||
Significant Factors, Assumptions and Methodologies used in Determining Fair Value of Share Based Payments
Stock-based compensation expense for DSU awards is based on the estimated fair value of our common stock on the grant date.
Stock-based compensation expense for options is based on the estimated fair value for each award on the grant date. We calculate the grant date fair value based on an option pricing model using estimated amounts for risk-free interest rate, dividend yield, estimated historical volatility of our common stock, the expected life of the awards and the estimated fair value of the underlying common stock. In addition to the assumptions used to calculate the fair value of the options, we are required to estimate the expected forfeiture rate of the option awards, and only recognize stock-based compensation expense for those option awards expected to vest. We recognize stock-based compensation expense as a component of either exploration, pre-development or general and administrative expense on a straight-line basis over the requisite service period of the award.
The following assumptions were used to compute the fair value of the options granted:
| | Grant Date | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Aug. 2017 | Nov. 2017 | Dec. 2017 | Jan. 2018 | May 2019 | Jan. 2020 | Mar. 2020 | |||||||
Risk-free interest rate | 1.83% | 2.18% | 2.18% | 2.18% | 2.38% | 1.63% | 1.63% | |||||||
Dividend yield | — | — | — | — | — | — | — | |||||||
Estimated volatility | 66.40% | 65.90% | 65.80% | 65.80% | 66.80% | 62.20% | 62.20% | |||||||
Expected option life | 6 years | 6 years | 6 years | 6 years | 6 years | 6 years | 6 years | |||||||
The following assumptions were used to compute the fair value of the options, that are required to be revalued each reporting period, as of the dates indicated:
| | December 31, | June 30, | ||||||
|---|---|---|---|---|---|---|---|---|
| | 2019 | 2018 | 2017 | 2020 | ||||
Risk-free interest rate | 1.76% | 2.55% | 2.26% | 0.39% | ||||
Dividend yield | — | — | — | — | ||||
Estimated volatility | 63.60% | 65.90% | 65.50% | 66.60% | ||||
Expected option life | 6 years | 6 years | 6 years | 6 years | ||||
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 are expected to be paid. We calculated the estimated volatility based on the historical volatility of a group of peer companies' common stock over the expected option life. The peer information was used because we were not publicly traded at the time of the grant, and therefore did not have the market trading history required to calculate a meaningful volatility factor. The computation of expected option life was determined based on a reasonable expectation of the option life prior to the option being exercised or forfeited. Based upon our expectation of forfeiture for these grants, we estimated a forfeiture rate of zero for our executive and director option grants, and a forfeiture rate of 10% for our employee option grants.
As of June 30, 2020, there was approximately $7,751 thousand of unrecognized stock-based compensation expense related to option awards that we expect to recognize over a weighted average vesting period of 2.1 years.
Common Stock Valuation
We estimated the fair value of our common stock in 2017, 2018, 2019 and 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. Based on this market data, the corresponding fair value of per share common stock was used in valuing the options and DSUs granted in 2017, 2018, 2019 and 2020.
Off Balance Sheet Arrangements
Other than the advanced royalty payments included in “—"Management's Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations”Obligations" above, we have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our stockholders.shareholders.
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.
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 its consolidated financial statements. Equity method investments are reviewed periodically for other-than-temporary decline in value. 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 incur certain costs on behalf of the LGJV, primarily related to a project development loan arrangement fee. Our 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.
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”"recoverable minerals" refers to the estimated amount of silver or other
commodities that will be obtained after taking into account losses during mining, mineralized materialmineral resources processing and treatment and ultimate sale. Estimates of recoverable minerals from such exploration stageexploration-stage mineral interests are risk-adjusted based on management’smanagement'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 life-of-mineLOM 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 stageexploration-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 mineralized materialmineral 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.
Reclamation ObligationsCommon Stock Valuation
Reclamation obligations are recognized when incurred and are initially measured at We estimated the fair value of our common stock in 2017, 2018, 2019 and subsequently adjusted for accretion expense and2020 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. Based on this market data, the amountcorresponding fair value of per share common stock was used in valuing the options and DSUs granted in 2017, 2018, 2019 and 2020.
Off Balance Sheet Arrangements
Other than the advanced royalty payments included in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations" above, we have no significant off-balance sheet arrangements that have or timingare reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our shareholders.
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 estimated cash flows.asset, liability or expense that is being reported.
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 its consolidated financial statements. Equity method investments are reviewed periodically for other-than-temporary decline in value. Our investment in the LGJV is presented as investment in affiliates in the consolidated balance sheet. The corresponding asset retirement costs are capitalized as part ofdifference between the carrying amount of the related long-lived assetinvestment in affiliates and depreciated overour equity in the asset’s remaining useful life. Reclamation obligations are basedLGJV's net assets is due to value of mineral resources at MPR. We incur certain costs on when the spending for an existing environmental disturbance will occur. We review, on at least an annual basis, the reclamation obligation at the Sunshine Mine site in accordance with guidance for accounting for asset retirement obligations.
Accounting for reclamation obligations requires management to make estimates unique to the Sunshine Minebehalf of the futureLGJV, primarily related to a project development loan arrangement fee. Our proportional share of such costs we will incurare reported as an investment in affiliate and the residual costs, related to completeDowa's proportional ownership, are reported in the reclamation work required to comply with existing laws and regulations. Actual costs incurred in future periods could differ from amounts estimated. Additionally, future changes to environmental laws and regulations could increase the extentstatement of reclamation work required. Any such increases in future costs could materially impact the amounts charged to earnings for reclamation.loss.
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 above to “—Mineral Properties and Carrying Value of Long-Lived Assets”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 discussionproperty, 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 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.
Our properties involve dealing with uncertainties and judgments in the application of complex tax regulations in multiple jurisdictions. The final taxes paidmeasured, indicated or inferred resource base, are dependent upon many factors, including negotiations with taxing authorities in various jurisdictions and resolution of disputes arising from federal, state, and Mexico tax audits. We recognize potential liabilities and record tax liabilities for anticipated tax audit issues, if any, in the United States and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. We adjust these reserves in light of changing facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. If our estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If an estimate of tax liabilities proves to be greater than the ultimate assessment, a tax benefit would result. We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
Stock-Based Compensation
Our stock based compensation includes stock options granted to employees, directors and various individuals and entities on our former Advisory Board. On October 30, 2012 the Company granted 1,494,682 options at a strike price of $13.83 per share and all of the options granted in 2011 were cancelled.
The following table sets forth information for our option grants from January 1, 2010 through December 31, 2012:
Grant Date | Options Granted | Exercise Price | ||||||
2010 | — | — | ||||||
2011(1)(2)(3)(4) | 413,600 | 13.83 - 27.65 | ||||||
2012 | 1,494,682 | 13.83 | ||||||
In addition, on June 30, 2010, Los Gatos Ltd. issued 174,949 ordinary shares (valued at $0.20 per share) for an aggregate of $2 to an employee of a related entity.
Significant Factors, Assumptions and Methodologies used in Determining Fair Value of Options
Stock-based compensation expense for options is based on the estimated fair value for each award on the grant date. We calculate the grant date fair value based on an option pricing model using estimated amounts for risk-free interest rate, dividend yield, estimated volatility of our common stock, the expected life of the awards andincluded when determining the fair value of mine site reporting units at acquisition and, subsequently, in determining whether the underlying common stock.assets are impaired. The term "recoverable minerals" refers to the estimated amount of silver or 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 additionestimating 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 calculateassess impairment. The ability to achieve the fairestimated 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 options, we are required to estimate the expected forfeiture rate of the option awards, and only recognize stock-based compensation expense for those option awards expected to vest. We recognize stock-based compensation expense as a component of either exploration, pre-development or general and administrative expense on a straight-line basis over the requisite service period of the award.
We calculated the fair value of options granted October 30, 2012 using the following assumptions:
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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 are expected toasset can be paid. We calculated the estimated volatility based on the historical volatility of a group of peer companies’ common stock over the expected option life. The peer information was used because we were not publicly traded at the time of the grant, and therefore did not have the market trading history required to calculate a meaningful volatility factor. The computation of expected option life was determined based on a reasonable expectation of the option life priorultimately realized, due to the option being exercised or forfeited. Based upon our expectationstill lower level of forfeiture for these grants, we estimated a forfeiture rate of zero for our executivegeological confidence and director option grants, and a forfeiture rate of 10% for our employee option grants.
As of December 31, 2012, there was approximately $6,720 of unrecognized stock-based compensation expense related to non-vested stock option awards that we expect to recognize over a weighted average vesting period of 2.6 years.
On February 16, 2013, the Company granted 1,512,878 options at a strike price of $13.83 per share.
Assuming an initial public offering price of $ per share, the midpoint of the price range set forth on the cover page of this prospectus, the intrinsic value of stock options outstanding after giving effect to the 1,512,878 options granted to directors, executives and employees, was $ , of which $ related to options that were vested and $ related to options that were unvested. See “Executive and Director Compensation—Stock Option Grants” and “Executive and Director Compensation—Director Compensation.”economic modeling.
Common Stock Valuation
We estimated the fair value of our common stock in March2017, 2018, 2019 and May 2011 based on a market value approach of our common stock. During March 2011, an unrelated party purchased 15% of our common stock for $13.83 per share. Subsequent to this purchase through September 30, 2011, investors purchased approximately 6% of our common stock for $13.83. Accordingly, based on this market data, a fair value of $13.83 per share of common stock was used in valuing the options granted in March and May 2011. We estimated the fair value of our common stock in July 2011, August 2011, October 2012 and February 20132020 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. Based on this market data, the corresponding fair value of per share common stock was used in valuing the options and DSUs granted in 2017, 2018, 2019 and 2020.
Off Balance Sheet Arrangements
Other than the advanced royalty payments included in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations" above, we have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our shareholders.
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.
Los Gatos Ltd. Ordinary Share ValuationEquity Method Investment
Stock based compensation We account for stock soldour 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 its consolidated financial statements. Equity method investments are reviewed periodically for other-than-temporary decline in value. 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 or givenvalue of mineral resources at MPR. We incur certain costs on behalf of the LGJV, primarily related to a project development loan arrangement fee. Our proportional share of such costs are reported as an investment in affiliate and the residual costs, related parties (including their employees)to Dowa's proportional ownership, are reported in the statement of loss.
Mineral Properties and vendors has beenCarrying 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 sharesassets are impaired. The term "recoverable minerals" refers to the estimated amount of silver or 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 excesssuch 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 price paid forasset. 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 stock. Forperiods 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 174,949 ordinary shares soldassumptions used in 2010, the faircash 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 ordinary shares was determinedasset can be ultimately realized, due to the still lower level of geological confidence and economic modeling.
Reclamation Obligations
Reclamation obligations are recognized when incurred and are 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 depreciated over the asset's remaining useful life. Reclamation obligations are based on when the spending for an existing environmental disturbance will occur. We review, on at least an annual basis, the reclamation obligation at the Sunshine Mine in accordance with guidance for accounting for asset retirement obligations.
Accounting for reclamation obligations requires management to make estimates unique to the Sunshine Mine relating to the future costs we will incur to complete the reclamation work required to comply with existing laws and regulations. Actual costs incurred in future periods could differ from amounts estimated. Additionally, future changes to environmental laws and regulations could increase the extent of reclamation work required. Any such increases in future costs could materially impact the amounts charged to earnings for reclamation.
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 above to "Management's Discussion and Analysis of Financial Condition and Results of Operations—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 Board of Directorsdeferred tax assets recorded at the reporting date.
Our properties involve dealing with the assistance of management. We utilized the guidance set forth by the American Institute of Certified Public Accountants, or the AICPA,uncertainties and judgments in the AICPA Technical Practice Aid when establishingapplication 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, state and Mexico tax audits. We recognize potential liabilities and record tax liabilities for anticipated tax audit issues, if any, in the fair valueUnited States and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. We adjust these reserves in light of changing facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the ordinary shares attax liabilities. If our estimate of tax liabilities proves to be less than the purchase date.
The 2010 ordinary share valuation (which also required valuing the outstanding Los Gatos Ltd. preferred shares) was based onultimate assessment, an enterprise value and option pricing model. As an active market for our Los Gatos Ltd. shares did not exist, our analysis was based on estimates of the enterprise value discussed below attributableadditional charge to the ordinary shares of Los Gatos Ltd. From guidance in the AICPA Technical Practice Aid, we selected an option pricing model that treated Los Gatos Ltd.’s ordinary and preferred shares as call options on the enterprise value, with the exercise price based on the liquidation preference of the preferred shares. Given the liquidation
preference of the preferred shareholders, in some cases a majority of the enterprise value was attributed to the preferred shares in the option pricing model. We calculatedexpense would result. If an estimate of share price volatility based ontax liabilities proves to be greater than the ultimate assessment, a sampletax benefit would result. We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
Jumpstart Our Business Startups Act of comparable company volatilities since Los Gatos Ltd. shares were not actively traded. Additionally, our option pricing model included discount factors of 35% and 20% for lack of marketability and control by a single shareholder, respectively. Based on the assumptions used and the model described above, a value of $0.20 per share was allocated to the ordinary shares granted to an employee of a related entity on June 30, 2010. To estimate the enterprise value, we used the following information:
No offers to sell or solicitations to purchase any portion of Los Gatos Ltd.’s assets or shares occurred from the period January 1, 2010 to June 30, 2010.
A valuation of the assets (exploration properties) held by Los Gatos Ltd. by reference to comparable sales of exploration property and the likelihood of exploration success at our Los Gatos Ltd. properties. Our valuation compiled information on transactions recently completed by companies listed on various stock exchanges and having precious-metals exploration properties in similar geographic areas and political jurisdictions; specifically Mexico. From the review of numerous transactions, a number of appropriate transactions were selected for analysis to establish a range of values for the subject properties as of June 30, 2010. The likelihood of success was determined based upon the activities performed on the various exploration concessions held by Los Gatos Ltd.
We obtained information on several underground silver-dominated, vein resources/deposits in Mexico that were either in production or the infrastructure was in construction. We estimated a value per silver equivalent ounce for each resource/deposit, where possible.
In addition, we considered the following subsequent events in support of our valuation:
A proposed transaction (with an unrelated party that was never consummated) to acquire a portion of Los Gatos Ltd.
The discussions and negotiations with Liberty Metals and Mining, an unrelated party, that ultimately purchased 15% of Sunshine Silver Mines Corporation in March 2011.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see note 2 to the December 31, 2012 consolidated financial statements.
JOBS Act
On April 5, 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies.
As defined in the JOBS Act, a public company whose initial public offering of common equity securities occurs after December 8, 2011 and whose annual gross revenues are less than $1.0 billion will, in general, qualifypermits us, as an “emerging"emerging growth company” untilcompany," to 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 earliest of:
the last day of its fiscal year following the fifth anniversary of the date of its initial public offering of common equity securities;
the last day of its fiscal year in which it has annual gross revenue of $1.0 billion or more;
the daterelevant dates on which it has, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; and
the date on which itadoption of such standards is deemed to be a “large accelerated filer,” which will occur at such time as the company (a) has an aggregate worldwide market value of common equity securities held by non-affiliates of $700 million or more as of the last business day of its most recently completed second
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Under this definition, we will be an “emerging growth company” upon completion of this offering and could remain anrequired for public companies that are not emerging growth company until as late as December 31, 20 .
We are in the process of evaluating the benefits of relying on the reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, if, as an “emerging growth company”, we choose to rely on such exemptions we may not be required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) comply with any requirement that may be adopted by the PCAOB regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis), and (iv) disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the CEO’s compensation to median employee compensation. However, we have electedcompanies. The decision to opt out of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) ofunder the JOBS Act and our election is irrevocable. That provision would have permitted us to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.
Quantitative and Qualitative Disclosures About Market Risk
Commodity Price Risk
We intend to engage in the production of silver and concentrates containing silver, lead, zinc and antimonygold at the SunshineCerro Los Gatos Mine and the Los Gatos Project.commenced production on September 1, 2019. Accordingly, we expect the principal source of future revenue at the LGJV to be the sale of concentrates containing silver, and to a lesser extent, lead and zinc. A significant and sustained decrease in the price of these metals from current levels could have a material and negative impact on our business, financial condition and results of operations.
Foreign Currency Risk
Although most of our expenditures are in U.S. dollars, certain purchases of labor, operating supplies and capital assets are denominated in other currencies, primarily the Mexican Peso.peso. As a result, currency exchange fluctuations may impact the costs of our operations. To reduce this risk, we maintain limited cash balances in foreign currencies and transact most of our purchases in U.S. dollars.
Concentration of Risk
We have placed nearly all of our cash investments with a single, high-quality financial institution. All cash equivalents are invested in high-quality, short-term money market instruments, including government securities, bankers’bankers' acceptances, bank notes, certificates of deposit, commercial paper and repurchase agreements of domestic and foreign issuers. At no time have we had funds invested in asset-backed commercial paper. We have not experienced any losses on our cash investments.
Overview
Silver is one of the eight precious, or noble, metals; the others are gold and the six platinum-group metals. Silver occurs naturally in its solid metallic state and is commonly associated with deposits of gold, copper, lead and zinc.
As an industrial and monetary asset, silver haszinc as a dual personality that differentiates itsecondary metal. Silver is distinct from other precious metals. On the one hand, silvermetals in that it is both used in industrial applications and as an investment asset.
Silver has a number of distinctive physical and chemical properties that makesmake it an essential component in numerous industrial applications, including its strength, malleability, conductivity and ductility, its sensitivity to and high reflectance of light and its ability to endure extreme temperature ranges. These properties restrict its substitution in most applications. Silver is one of the world's best conductors of electricity and is used in electronic components of common items such as solar panel photovoltaic cells, computers, televisions and cell phones.
On the other hand, silver Silver has also been used as a medium of exchange since earliest recorded history. From the time of the Roman Empire until the 19th century, most nations were on a silver standard with silver coins forming the main circulating currency. While silverit is no longer widely used as circulating currency, the metalsilver is still widely sought by investors for its store of value attributes. In particular, silver is viewed as an attractive hedge against a decrease in the value of the U.S. dollarcurrency and inflation during times of economic uncertainty.
Silver Demand
Silver has strong supply and The three principal drivers of silver demand fundamentals with significant demand rooted in diverse sectors. The demand for silver is driven primarily by three uses:are industrial applications, consumer use and investment. According to GFMS,The Silver Institute's World Silver Survey 2020, demand for industrial applications is mainly driven by electrical and electronics uses, which accounted for 58.3% of industrial demand and 30.0% of total demand in 2011, industrial, consumer2019. Jewelry accounted for 20.3% of total demand and net physical investment represented 46.8%, 37.5% and 15.8%18.8% of silvertotal demand.
Silver demand respectively.
Industrial and consumer demand for silver, which isgrew 0.4% in 2019 to a three-year high of 991.8 million ounces, from 988.3 million ounces the form of manufactured end-products has remained relatively stable over the past decade. The loss in demand attributable to photography and silverware has been absorbedprevious year, driven by a 12.3% surge in demand for coinsnet physical investment. This was offset by declines in silverware and medallions.
With rapid populationother industrials. Silver remains difficult to substitute in many areas, and income growth, surgingoutside of a dip in 2009, demand for consumer electronics and a burgeoning housing market, China is the largest global silver marketplace fueling industrial and consumer demand for silver. According to GFMS, silver fabricationapplications has remained broadly flat since 2007. There was healthy photovoltaic demand in China is estimated to have risen2019, with support from 59.7 million ouncesstructural changes in 2002 to 139.9 million ouncesdemand, such as vehicle electrification.
World Physical Silver Demand in 2011, an increase of 134. 3%. While Chinese demand has grown substantially, we believe that it has the potential to grow further, as evidenced by its demand per capita. According to GFMS, Chinese fabrication demand per capita is only 0.10 ounces per person. In comparison, U.S. fabrication demand per capita is 0.63 ounces per person.
Source: The table below denotes global silver supply and demand from 2002 to 2011:Silver Institute, World Silver Survey 2020
MMoz | ||||||||||||||||||||||||||||||||||||||||
| 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | |||||||||||||||||||||||||||||||
Supply | ||||||||||||||||||||||||||||||||||||||||
Mine Production | 595 | 597 | 614 | 637 | 641 | 666 | 684 | 716 | 751 | 762 | ||||||||||||||||||||||||||||||
Net Government Sales | 59 | 89 | 62 | 66 | 79 | 43 | 31 | 16 | 44 | 12 | ||||||||||||||||||||||||||||||
Old Silver Scrap | 197 | 196 | 197 | 202 | 206 | 203 | 201 | 200 | 229 | 257 | ||||||||||||||||||||||||||||||
Producer Hedging | — | — | 10 | 28 | — | — | — | — | 50 | 11 | ||||||||||||||||||||||||||||||
Implied Net Disinvestment | 17 | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
Total Supply | 868 | 882 | 882 | 932 | 926 | 911 | 915 | 932 | 1,075 | 1,041 | ||||||||||||||||||||||||||||||
Demand | ||||||||||||||||||||||||||||||||||||||||
Fabrication | ||||||||||||||||||||||||||||||||||||||||
Industrial Applications | 355 | 368 | 387 | 432 | 454 | 491 | 493 | 405 | 500 | 487 | ||||||||||||||||||||||||||||||
Photography | 204 | 193 | 179 | 160 | 142 | 118 | 101 | 79 | 72 | 66 | ||||||||||||||||||||||||||||||
Jewelry | 169 | 179 | 175 | 174 | 166 | 164 | 159 | 160 | 167 | 160 | ||||||||||||||||||||||||||||||
Silverware | 84 | 84 | 67 | 68 | 61 | 59 | 57 | 59 | 51 | 46 | ||||||||||||||||||||||||||||||
Coins & Medals | 32 | 36 | 42 | 40 | 40 | 40 | 65 | 79 | 99 | 118 | ||||||||||||||||||||||||||||||
Total Fabrication | 844 | 860 | 851 | 874 | 864 | 871 | 875 | 782 | 890 | 877 | ||||||||||||||||||||||||||||||
Producer De-Hedging | 25 | 21 | — | — | 7 | 24 | 9 | 17 | — | — | ||||||||||||||||||||||||||||||
Implied Net Investment | — | 1 | 32 | 58 | 55 | 17 | 31 | 132 | 185 | 164 | ||||||||||||||||||||||||||||||
Total Demand | 868 | 882 | 882 | 932 | 926 | 911 | 915 | 932 | 1,075 | 1,041 | ||||||||||||||||||||||||||||||
Source GFMS World Survey 2012 | ||||||||||||||||||||||||||||||||||||||||
The table below denotes Chinese fabrication demand for silver by segment:
Industrial DemandApplications
Traditional industrial applications of silver include batteries, bearings, brazing and catalysts. Silver, which is the best conductor of electricity among all metals, is used in virtually all electronics. In addition to traditional industrial uses, increases in emerging applications for silver, such as in the electric powertrain and other applications that are increasingly featured in hybrid internal combustion engine cars and electric vehicles, as well as LCD and RFID technologies, are expected to continue to augment industrial demand. Emerging applications include the advent of flexible electronics in which silver batteries play a prominent role, utilizing silver’ssilver's reflectivity as a component in solar cells to produce “green”"green" electricity and utilizing silver’ssilver's antimicrobial properties in medical applications and in the prevention of algae build-up in water purification systems.
According to GFMS, between 2009 and 2011, Global industrial demand, forwhich represented 51.5% of total silver rose by 20.1%, to 486.5demand in 2019, totaled 511.5 million ounces.ounces, flat from 2018. A major source of the6.7% increase in silver demand from the photovoltaic sector was offset by an annual decrease in the electronics and electrical sector. Combined, China, the United States and Japan accounted for 347.1 million ounces, representing 67.9% of total 2019 industrial demand for silver was thedemand.
The electrical and electronics sector. Silver’ssector has consistently ranked as the largest source of industrial silver demand. Silver's electrical and thermal conductive properties make it ideal for multiple high performancehigh-performance electronics and high voltage circuits, connectors and other electrical components, which are all integral parts of electronics. Such uses include switches, contacts, fuses, superconductors and printed circuit boards, which are contained in computers, mobile phones and other smart technologies. According to GFMS,The Silver Institute's World Silver Survey 2020, silver demand from the electrical and electronics sector reached 244.6297.6 million ounces in 2011,2019. At 84.7 million ounces, Japan accounted for 28.5% of 2019 electrical and electronics demand, with China (23.3%) and the second highest level on record, up 30.8%United States (21.0%) also accounting for significant demand.
Historically, photographic uses represented a large source of silver demand, accounting for 74% of total silver demand in 1999. However, photographic use has since declined significantly, driven by the
transition from 2009.silver halide to digital technology, especially in the area of consumer film. In 2019, photographic uses accounted for just 3.4% of total silver demand, according to The Silver Institute's World Silver Survey 2020.
Accelerated While photographic uses have declined, new technologies have emerged. For example, accelerated growth in the solar panel market alsohas contributed to silver industrial demand in 2010.recent years. Silver is used both as a conductor in solar cells and as a reflector in mirrors used to concentrate solar energy. Demand for silver from the solar panel industry surgedphotovoltaics accounted for 19.3% of industrial demand and 10.0% of total physical silver demand in 2010, up 70% over 2009 levels, and growth continued in 2011 to over 50 million ounces2019, according to GFMS.
The table below denotes electrical and electronic fabrication demand for silver:Silver Institute's World Silver Survey 2020.
Consumer DemandUse
Consumer use of silver is primarily Silver's luster, resistance to tarnishing and malleability are properties well suited for the fabrication of jewelry silverware and coins, which rely on silver’s lustre, resistance to tarnishing and malleability. According to GFMS, the jewelry sector accounted for 15.4% of total demand for silver in 2011, followed by coins and medals with 11.4% of total demand and silverware with 4.4% of total demand.silverware. For these uses, silver is often alloyed to a small proportion of other metals, such as copper, to harden it. Sterling silver, for example, is 92.5% silver and 7.5% copper and has been the standard in many countries for silver jewelry since the 14th14th century. There has been a sharp uptick
According to The Silver Institute's World Silver Survey 2020, in Chinese consumer2019, the jewelry sector accounted for 20.3% of total demand for silver, as GFMS data indicates that Chinesewhile silverware fabrication rose by 10%accounted for 6.0% of total demand. In 2019, demand for jewelry (201.3 million ounces) and silverware (59.8 million ounces) declined 0.9% and 8.6% year-on-year, respectively. Jewelry demand is driven primarily from South Asia and East, which accounted for 134.4 million ounces, or 66.8% of global demand in 2011 and Chinese jewelry demand continued to grow.
Historically, photographic uses represented silver’s second largest source of demand, after industrial applications. However, photographic off-take2019. Since 2014, India has been on a steady decline since 2001, driven by the moveworld's largest silver jewelry consumer; in 2019, demand from silver halideIndia fell 4.8% to digital technology, especially69.0 million ounces as an economic slowdown, erratic monsoons and the deepening liquidity crunch all negatively impacted demand. Other large global markets include Thailand and China (representing 14.2% and 11.3%, respectively, of 2019 global demand). India is also the world's largest consumer of silverware, accounting for 41.2 million ounces, or 68.9%, of 2019 global silverware demand in the area of consumer film. In 2011, photographic uses accounted for 6.4% of total silver demand, according to GFMS.2019.
According to GFMS, between 2009 and 2011, consumer demand for silver rose by 3.5%, to 390.1 million ounces. Despite a marginal slowdown in demand for photography, jewelry and silverware, consumer demand for silver in 2011 was supported by an increase in demand for silver coins and medals. The fabrication of coins and medals has increased gradually for much of the past decade, but growth has accelerated since the onset of the financial crisis in 2008. According to GFMS, silver demand for coins and medals in 2011 increased 18.9% from 2010, to 118.2 million ounces.
Investment Demand
Silver has been a store of monetary value for over 4,000 years.years, and it continues to play an important part in investor portfolio diversification. Historically, the price of silver has shown at times a high correlation to the price of gold as a result of investment demand, and has been at times viewed as an attractive hedge against a decrease in the value of the U.S. dollarcurrency and inflation, attracting investors during times of uncertainty.
Identifiable physical investment demand increased by 12.3% to 186.1 million ounces in 2019, the largest one-year increase since 2015. The Silver Institute attributes this rise to improved safe haven demand for precious metals from uncertainties stemming from the US-China trade dispute and a manufacturing slowdown in several industrialized countries.
Investment demand for silver has increased significantlyrepresented a significant portion of total annual silver supply over the last decade. Over the last ten years, investment in coins and metals amounted to 1.1 billion ounces, which was one-tenth of total silver supply over that period. Silver investment demand flourished in the past 10aftermath of the financial crisis and during the height of economic uncertainty in the Eurozone. Between 2013 and 2015, silver physical investment accounted for more than 22% of annual supply, with a peak of 28% recorded in 2015, according to GFMS, formerly known as Gold Fields Mineral Services ("GFMS"). In addition, silver ETP holding rose 13% to 729 million ounces, the largest year-over-year increase since 2010.
Silver Supply
Silver supply is primarily driven by mined silver production, which, according to The Silver Institute's World Silver Survey 2020, accounted for 81.7% of supply in 2019. Recycling largely accounted
for the remainder of silver supply. Global silver supply increased 0.6% year-over-year in 2019 to 1,023 million ounces compared to 1,016.8 million ounces in 2018.
Mine silver output in 2019 declined for the fourth consecutive year, falling 1.3% to 836.5 million ounces from 847.8 million ounces in 2018. These recent production declines follow 13 consecutive years with the most significant investment demand coming from investment products such as bullion funds and silver ETFs. In 2011, net investmentof growth. The decrease in silver supply was 163.9 million ounces, representing 15.8%largely driven by lower grades at primary silver mines, lower silver production from copper mines and losses from production disruptions. In Peru, Compañía de Minas Buenaventura's Uchucchacua Mine saw silver production decrease from a 27% decline in grades and experienced a 21-day strike; Hochschild Mining's Arcata Mine was placed into care and maintenance early in the year; and declining silver grades were a factor at large primary copper mines. In Mexico, Fresnillo plc achieved lower grades at several of silver demand, according to GFMS. GFMS data indicates that investors purchased nearly 300 million ounces of silverits mines; First Majestic Silver Corp.'s San Martin Mine and Endeavour Silver's El Cubo Mine were placed on care and maintenance; and blockades resulted in 2010, and strong growth in investment demand continued into 2011, as total ETF holdings reached 576 million ounces. Continued macro-economic concerns regarding the sovereign debt crisis in Europe, political problems worldwide, high unemployment in developed countries and rising inflation in developing countries were all factors that attracted investors to silver in 2011.
The graph below depicts net silver investment since 2002:Newmont Corporation's Peñasquito Mino being suspended for 90 days.
Mexico was the world’sworld's largest silver mining country in 2011 (152.82019 (190.3 million ounces)ounces, down 2.2% from 2018), followed by Peru (109.8(135.4 million ounces),ounces, down 7.6% from 2018) and China (103.9(110.7 million ounces), Australia (55.2ounces, up 0.06% from 2018). The chart below illustrates global mined silver production from 2011 through 2019.
Source: The Silver Institute, World Silver Survey 2020
In 2019, just 28.7% of silver produced globally (240.0 million ounces) and Chile (42.1was derived from primary silver mines, down 3.8% from 249.4 million ounces). The graph below illustrates the world’s leadingounces produced from primary silver mines in 2011, based on their production:2018. The remaining 71.3% of silver mined in 2019 was a by-product of lead/zinc, copper, gold and other operations. By-product silver production, which represents over two-thirds of global silver production, is typically inelastic with respect to the silver price.
Global recycled silver supply also expanded slightly in 2019 by 1.3% to 169.9 million ounces. Industrial recycling is the largest source of recycled silver and rose for the fifth consecutive year. An increase in recycled supply was recorded across all regions, other than the Commonwealth of
Independent States. Recycled supply from North America was the highest in 2019, representing 33.8% of the global total.
Silver Supply from Recycling (Moz)
World’s Leading Primary
Source: The Silver Mines, 2011Institute, World Silver Survey 2020
Traditionally,Historically, another source of supply has been government sales, but governmentalwhich amounted to 44 million ounces in 2010, according to GFMS data. However, government sales have beenof silver stocks were minimal in decline recently.the early part of this decade, and GFMS estimates that net governmentno significant sales stood at 11.5have occurred since 2013.
A combination of a slightly higher demand and a slightly higher supply in 2019 compared to 2018 resulted in a surplus of 31.3 million ounces, or 3.1% of silver demand, according to The Silver Institute's World Silver Survey 2020. Net investment in 2011, down 74% year-on-yearexchange traded products of 81.7 million ounces helped to propel the lowest level in more thannet silver balance to a decade. By the end50 million ounce deficit, or approximately 5% of 2011, total government silver stocks were estimated to have fallen to 97.0 million ounces. The chart below depicts above-ground silver stocks since 2002.demand.
2011-2019 Global Silver Supply and Demand (Moz)
| | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Supply | ||||||||||||||||||||||||||||
Mine Production | 760.1 | 792.7 | 840.3 | 877.5 | 892.9 | 892.3 | 863.4 | 847.8 | 836.5 | |||||||||||||||||||
Recycling | 232.9 | 216.0 | 192.7 | 174.9 | 166.5 | 164.4 | 167.7 | 167.7 | 169.9 | |||||||||||||||||||
Net Hedging Suplpy | 11.9 | — | — | 10.7 | 2.2 | — | — | — | 15.7 | |||||||||||||||||||
Net Official Sector Sales | 4.8 | 3.6 | 1.7 | 1.2 | 1.1 | 1.1 | 1.0 | 1.2 | 1.0 | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Supply | 1,009.7 | 1,012.4 | 1,034.7 | 1,064.2 | 1,062.6 | 1,057.8 | 1,032.2 | 1,016.8 | 1,023.1 | |||||||||||||||||||
Demand | ||||||||||||||||||||||||||||
Industrial | 508.1 | 450.5 | 460.8 | 449.6 | 456.2 | 490.3 | 517.2 | 511.5 | 510.9 | |||||||||||||||||||
...of which photovoltaics | 68.4 | 55.0 | 50.5 | 48.4 | 54.1 | 93.7 | 101.8 | 92.5 | 98.7 | |||||||||||||||||||
Photography | 61.6 | 52.5 | 45.8 | 43.6 | 41.2 | 37.8 | 35.1 | 34.2 | 33.7 | |||||||||||||||||||
Jewelry | 162.2 | 159.2 | 187.1 | 193.5 | 202.6 | 189.2 | 196.3 | 203.1 | 201.3 | |||||||||||||||||||
Silverware | 41.5 | 40.1 | 45.7 | 52.4 | 56.6 | 52.3 | 57.7 | 65.4 | 59.8 | |||||||||||||||||||
Net Physical Investment | 272.0 | 240.8 | 300.1 | 282.6 | 310.4 | 213.9 | 156.2 | 165.7 | 186.1 | |||||||||||||||||||
Net Hedging Demand | — | 40.4 | 29.3 | — | — | 12.0 | 2.1 | 8.4 | — | |||||||||||||||||||
Total Demand | 1,045.4 | 983.5 | 1,068.9 | 1,021.6 | 1,067.0 | 995.5 | 964.7 | 988.3 | 991.8 | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Market Balance | (35.7 | ) | 28.9 | (34.2 | ) | 42.6 | (4.4 | ) | 62.3 | 67.5 | 28.5 | 31.3 | ||||||||||||||||
Net Investment in ETPs | (18.9 | ) | 53.6 | 4.6 | (0.5 | ) | (17.2 | ) | 50.9 | 6.8 | (22.3 | ) | 81.7 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Market Balance less ETPs | (16.9 | ) | (24.7 | ) | (38.8 | ) | 43.1 | 12.8 | 11.3 | 60.7 | 50.8 | (50.4 | ) | |||||||||||||||
Source: The Silver Institute, World Silver Survey 2020
Markets and Outlook
Over the last twenty five years, the The price of silver which proved relatively volatile in that timeframe, increased 542.6%.has experienced significant volatility over the last 25 years. The price of silver averaged approximately $4.71 per ounce$4.71/oz from 2000 through the end of 2003. Beginning in 2004, the price of silver began to appreciate considerably, reaching a high of $48.70 per ounce$48.70/oz in April 2011.
Rising silver prices have boosted investor interest This significant ascent in the metalprice of silver was driven in part by investors' heightened risk aversion amid concerns over the possible effects of quantitative easing measures introduced in the wake of the global financial crises of 2008 and led2009. Subsequent to April 2011, the silver price trended lower, with the average annual price declining for four consecutive years between 2012 and 2015, reaching a significant increaselow of $13.65/oz in silver’s investor base. During 2010, tradingDecember 2015. Between January 1, 2016 and August 31, 2020, the price of silver traded within a range of $12.01 and $28.33/oz.
In 2019, the average LBMA silver price increased 3.4% year-over-year to $16.21/oz. In 2019, the price of silver reached a high of $19.31/oz, a low of $14.38/oz and ended the year at $18.05/oz. The largest contributor to silver price movements is believed to be the ongoing trade dispute between the U.S. and China, which has had the impact of strengthening the U.S. dollar and weighing on the price of silver and other precious metals. The U.S. Federal Reserve took a dovish stance through 2019, as it lowered the federal funds rate three times.
The price of silver rallied strongly to multi-year highs in August 2020. As of August 31, 2020, the LBMA silver price has increased 52% compared to the year-end 2019 price. The recent silver price appreciation is believed to have been driven by accommodative monetary policy, aggressive stimulus measures and accelerating investment demand in the midst of the COVID-19 pandemic, as well as disrupted production and a recovery in industrial consumption. These factors have enhanced silver's appeal to investors seeking a hedge against inflation, a decrease in the value of the U.S. dollar and general economic and geopolitical uncertainty. Trading volumes at futures and options exchanges have increased significantly, and the dollar valueETPs inflows have been strong. As of August 31, 2020, silver flows among market participants nearly doubled from 2009 levels. Investor holdings in silver remained at elevated levels during 2011, and total volumes reachedhas a new highlong-term research analyst average consensus price outlook of 621.3 million ounces by late April. According to GFMS, a steep rally in the price$18.75/oz.
A chart indicating silver prices between January 1, 19862000 and February 27, 2013July 31, 2020 is set out below. As of February 27, 2013,August 31, 2020, the price of silver was $29.0050 per ounce.$27.35/oz.
January 2000—August 2020 Silver Price (US$/oz Ag)
Source: BloombergS&P Capital IQ
The following chart shows the comparative return of an investment in silver versus certain other investments:
Comparative Returns to February 27, 2013August 31, 2020
| | Percentage Change | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 1-Year | 5-Year | 10-Year | |||||||
Silver | 53.2 | % | 92.4 | % | 45.3 | % | ||||
Gold | 29.4 | % | 73.4 | % | 57.8 | % | ||||
Oil | (22.7 | %) | (13.4 | %) | (40.8 | %) | ||||
S&P 500 | 19.6 | % | 77.5 | % | 233.6 | % | ||||
FTSE | (17.3 | %) | (4.6 | %) | 14.1 | % | ||||
Nikkei | 11.8 | % | 22.5 | % | 162.2 | % | ||||
MSCI World Index | 14.8 | % | 49.2 | % | 127.2 | % | ||||
$/EUR | (8.0 | %) | (6.1 | %) | 6.2 | % | ||||
Source: Bloomberg
| Percentage Change | ||||||||||||
| 1-Year | 5-Year | 10-Year | ||||||||||
Silver | (18.0 | %) | 50.5 | % | 534.9 | % | ||||||
Gold | (9.6 | %) | 66.8 | % | 362.4 | % | ||||||
Oil | (9.6 | %) | 14.6 | % | 240.9 | % | ||||||
S&P 500 | 10.9 | % | 9.9 | % | 81.1 | % | ||||||
FTSE | 6.9 | % | 4.1 | % | 77.2 | % | ||||||
Nikkei | 16.8 | % | (19.8 | %) | 34.6 | % | ||||||
MSCI World Index | 7.8 | % | (6.6 | %) | 87.4 | % | ||||||
$/EUR | (1.9 | %) | (13.1 | %) | 22.3 | % | ||||||
13 Week T-Bill | 0.1 | % | 0.3 | % | 1.6 | % | ||||||
10 Year Bond | 1.8 | % | 2.9 | % | 3.6 | % | ||||||
30 Year Bond | 2.9 | % | 3.8 | % | 4.3 | % | ||||||
Notes: T-bills and T-bondsWe are average rates of return
Source: Bloomberg
In the short to mid-term, GFMS believes that the economic backdrop for investment in silver will remain supportive as monetary policy is unlikely to significantly tighten in 2012 with ongoing economic, inflation and sovereign debt concerns. This is expected to encourage investment demand for silver and enhance industrial and consumer demand.
The Company
Sunshine Silver Mines Corporation is a U.S.-based precious metals explorationproduction, development and developmentexploration company with the objective of becoming one ofa premier silver producer. We were formed on February 2, 2011, when our predecessor Precious Metals Opportunities LLC, which was formed in December 2009, converted to a Delaware corporation. On March 1, 2011, Los Gatos Ltd. merged with and into us to form Sunshine Silver Mines Corporation. In 2014, we changed our name to Sunshine Silver Mining & Refining Corporation. In connection with the most profitable primary silver producers, with premium assets in the world’s safest jurisdictions. The Company isReorganization, we intend to change our name to Gatos Silver, Inc.
Our Principal Projects
We are currently focused on the advancementproduction and continued development of its two principal projects:the Cerro Los Gatos Mine and the further exploration and development of the Los Gatos District:
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In total, as of the date of this prospectus, the Company owns or controls a portfolio of 23 exploration properties in the United States and Mexico covering an area of approximately 576,336 hectares.
Charts of the Company’s corporate structure before and after this offering are set forth below.
Principal Projects
The Sunshine Mine, acquired by the Company in the first half of 2010, is located within the mining-friendly Coeur d’Alene Mining District in Idaho. As a past-producing mine, the Sunshine Mine is estimated to have produced over 365 million ounces of silver from 1904 to 2008. In 1990, the last year the Sunshine Mine operated at full capacity, silver production from the Sunshine Mine was approximately 5.4 million ounces. In 2008, Sterling, the prior owner of the Sunshine Mine, ceased production and in early 2009 went into bankruptcy due to, we believe, among other factors, falling silver prices and inadequate capital.
The Sunshine Mine has significant existing on-site infrastructure, including an operational primary shaft, which is being modernized and upgraded, and a secondary shaft, which is being refurbished. The Company’s consolidated land position at the Sunshine Mine property currently consists of approximately 3,901 hectares. The property has an abundant water supply, is connected to the electricity grid and is accessible by paved roads. The Company has all environmental permits in place to begin surface and sub-surface operations. Construction permits will be applied for as needed as the Company begins construction activities.
The Los Gatos Project is located approximately 120 kilometers south of the state capital of Chihuahua City in Northern Mexico and to date,is comprised of a 103,087-hectare land position, constituting a new mining district. The Los Gatos District consists of 14 mineralized zones, which include three identified silver discoveries, silver-lead-zinc deposits that contain mineral resources—the Cerro Los Gatos zone,Mine, the Esther zonedeposit and the Amapola zone,deposit—as well as 11 additional high-priority targets defined by high-grade drill intersections and 10 other priority targets with over 100150 kilometers of outcropping quartz and calcite veins. The area is characterized by a predominant silver-lead-zinc epithermal mineralization. On September 1, 2019, the LGJV commenced production at the Cerro Los Gatos Mine. A core component of the LGJV's business plan is to explore the highly prospective, underexplored Los Gatos District with the objective of identifying additional mineral deposits
that can be mined and processed, possibly utilizing the Cerro Los Gatos Mine plant infrastructure.
Business Strengths
Prior to our initial acquisition of exploration concession rights in April 2006, very limited historical prospecting and Competitive Advantagesexploration activities had been conducted in the Los Gatos District. We were able to acquire concessions covering approximately 103,087 hectares and, through our exploration, discovered a virgin silver region containing high-grade epithermal vein-style mineralization throughout the Los Gatos District concession package.
In 2008, we negotiated surface access rights with local ranch owners and obtained the necessary environmental permits for drilling and road construction. Through 2015, we purchased all the surface lands required for the Cerro Los Gatos Mine development. Environmental baseline data collection began in May 2010 and was completed in 2016 and approved in 2017 to prepare for the development of future environmental studies required for the Cerro Los Gatos Mine. In 2014, we partnered with Dowa to finance and develop the Cerro Los Gatos Mine and pursue exploration in the Los Gatos District. We and Dowa formed a Mexico-incorporated co-owned operating company, MPR, which owns certain surface and mineral rights associated with the Los Gatos District. In connection with the formation of the LGJV, we entered into the Unanimous Omnibus Partner Agreement, which governs our and Dowa's respective rights over the LGJV. We own approximately 51.5% of the LGJV, with Dowa owning the remainder. Despite owning the majority interest in the LGJV, we do 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 (such as certain approvals, the creation of security interests on property, any initial public offering of the joint venture, and litigation settlements). We intend to exercise our right to repurchase an 18.5% interest in the LGJV from Dowa, increasing our ownership to approximately 70.0%. Following this increase in our ownership interest in the LGJV, we will continue to not exercise control over the LGJV due to the provisions contained in the Unanimous Omnibus Partner Agreement that currently require unanimous partner approval of all major operating decisions. See "—The Los Gatos District—Unanimous Omnibus Partner Agreement."
We believe that we have strong support from the local community, with over 130 employees from the local community working across multiple areas involving the continued underground development, construction of the surface facilities and operation of the Cerro Los Gatos Mine. Over 99% of the approximate 540 employees at the Cerro Los Gatos Mine hail from Mexico, highlighting our commitment to the local workforce.
Our primary areas of focus have been constructing and commissioning the Cerro Los Gatos Mine and defining and expanding the mineral resources associated with the Cerro Los Gatos Mine, the Esther deposit and the Amapola deposit. As of July 1, 2020, 739 exploration drill holes have been completed in the Los Gatos District, totaling 259,060 meters. The Los Gatos Technical Report
estimates that the Cerro Los Gatos Mine contains 10.4 million tonnes of measured and indicated resources (or 5.4 million tonnes of measured and indicated resources on a 51.5% basis) inclusive of mineral reserves, at average grades of 269 g/t silver, 2.7% lead, 5.5% zinc, 0.34 g/t gold and 0.11% copper, or 3.5 million tonnes of measured and indicated resources (or 1.8 million tonnes of measured and indicated resources on a 51.5% basis) exclusive of mineral reserves, at average grades of 154 g/t silver, 2.2% lead, 4.3% zinc and 0.29 g/t gold, and 3.7 million tonnes of inferred resources (or 1.9 million tonnes of inferred resources on a 51.5% basis), at average grades of 107 g/t silver, 2.8% lead, 4.0% zinc and 0.28 g/t gold. The mineral resource estimates for the Cerro Los Gatos Mine have an effective date of September 6, 2019 and have not been updated since that time. The mineral resource estimates contained in the Los Gatos Technical Report are presented on an undiluted basis without adjustment for metallurgical recovery.
The Los Gatos Technical Report estimates that the Esther deposit contains 0.46 million tonnes of indicated resources (or 0.24 million tonnes of indicated resources on a 51.5% basis) at average grades of 133 g/t silver, 0.04 g/t gold, 0.02% copper, 0.70% lead and 2.10% zinc, and 2.29 million tonnes of inferred resources (or 1.18 million tonnes of inferred resources on a 51.5% basis) at average grades of 98 g/t silver, 0.12 g/t gold, 0.05% copper, 1.60% lead and 3.00% zinc; and the Amapola deposit contains 0.25 million tonnes of indicated resources (or 0.13 million tonnes of indicated resources on a 51.5% basis) at average grades of 135 g/t silver, 0.10 g/t gold, 0.02% copper, 0.10% lead and 0.30% zinc, and 3.44 million tonnes of inferred resources (or 1.77 million tonnes of inferred resources on a 51.5% basis) at average grades of 140 g/t silver, 0.10 g/t gold, 0.03% copper, 0.20% lead and 0.30% zinc. The mineral resource estimates for the Esther and Amapola deposits have an effective date of December 21, 2012 and have not been updated since that time. The mineral resource estimates contained in the Los Gatos Technical Report are presented on an undiluted basis without adjustment for metallurgical recovery.
Since the acquisition of the Los Gatos District concession package, we, Dowa and the LGJV have invested approximately $500 million in the development of the Cerro Los Gatos Mine. The Cerro Los Gatos Mine is currently in production. The first lead concentrate was shipped on September 3, 2019, and the first zinc concentrate was shipped on September 4, 2019. We anticipate increasing production to the designed 2,500 tpd rate by the end of the first quarter of 2021.
Our objectives at the Cerro Los Gatos Mine are to, among other things:
Our objectives at the Los Gatos District are to, among other things:
Ownership Structure
A chart of our project ownership structure after the Reorganization is set out below.
In this graphic, green rectangles represent legal entities and grey circles depict the mining operations owned by such legal entities.
(1) Silver Opportunity Partners LLC holds less than 0.01% interest in Minera Luz de Sol, S. de R.L. de C.V. due to requirements of Mexican law.
AttractiveHigh Quality and Long Life Assets
Once fully operational, the Cerro Los Gatos Mine is expected to generate average LOM unlevered, after-tax free cash flow of approximately $76 million per year on a 100% basis (or approximately $39 million per year on a 51.5% basis). Projected attributable net revenue and free cash flow, as set forth in Twothe Los Gatos Technical Report, are presented below:
Projected Net Revenue (in millions)
Projected Unlevered Free Cash Flow (in millions)
Net revenue is defined as net smelter return (revenue per tonne mined less the sum of concentrate refining, treatment and transportation costs per tonne mined), less royalties. Unlevered free cash flow is defined as unlevered operating cash flow less capital expenditures and changes in working capital. See also Section 22 of the World’s Premier SilverLos Gatos Technical Report. The Los Gatos Technical Report has an effective date of July 1, 2020. The mineral resource estimates contained in the Los Gatos Technical Report have an effective date of September 6, 2019. The mineral reserve estimates and the economic analysis contained in the Los Gatos Technical Report have an effective date of July 1, 2020 and exclude 655,746 tonnes of material that has been mined through June 30, 2020. For a discussion of the mineral resource estimates and mineral reserve estimates contained in the Los Gatos Technical Report, see "Business—The Los Gatos District—Mineral Resource Estimates—Cerro Los Gatos Mine, Esther and Amapola Deposits" and "Business—The Los Gatos District—Mineral Reserve Estimates—Cerro Los Gatos Mine." For a discussion of the assumed capital and operating costs in the Los Gatos Technical Report, see "Business—The Los Gatos District—Capital and Operating Costs." This information does not constitute guidance and you should not rely on it as an estimate or forecast of future performance. The Cerro Los Gatos net revenue and unlevered free cash flow are shown on a 51.5% ownership basis to reflect our current ownership interest in the LGJV. The 18.5% option represents our right to repurchase an 18.5% interest in the LGJV from Dowa. See "—Business Strategy." The level of geological uncertainty associated with an inferred mineral resource is too high to apply relevant technical and economic factors likely to influence the prospects of economic extraction in a manner useful for evaluation of economic viability. Inferred mineral resources are subject to uncertainty as to their existence and as to their economic legal feasibility.
Cerro Los Gatos Mine Successfully Commissioned with Significant Near-Term Production Growth
The Cerro Los Gatos Mine is currently in production, with final construction completed in the second quarter of 2019. Commissioning was successful, having achieved a number of key milestones, including:
Metal | Q2 2020 Actual Recovery | Q1 2020 Actual Recovery | Commissioning Forecast Recovery | Economic Analysis Recovery(1) | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Silver | 84.2 | % | 80.5 | % | 75.0 | % | 85.2 | % | |||||
Gold | 61.3 | % | 62.0 | % | 61.7 | % | 63.9 | % | |||||
Zinc | 77.0 | % | 69.4 | % | 64.1 | % | 73.2 | % | |||||
Lead | 87.1 | % | 83.9 | % | 81.9 | % | 85.2 | % | |||||
Additional Resource Growth Potential from Exploration of the Los Gatos District
In addition to the significant existing resources at the Cerro Los Gatos Mine, the Los Gatos District also contains the Esther and Amapola deposits and 11 other mineralized zones. With control of the concessions, the ability to develop the entire 103,087-hectare land position and more than 85% of the land position yet to be explored, we expect that we will stand to benefit from mineralization beyond those already identified in the 14 mineralized zones, which include the Cerro Los Gatos Mine, the Esther deposit and the Amapola deposit.
Assets Located in Geopolitically Safe and Established Mining Regions
Sunshine Silver’s principal assets are located in two of the world’s premier silver regions. The Sunshine Mine propertyLos Gatos District is located in one of the Coeur d’Alene Mining District in Idaho, which district is estimated to have produced over one billion ounces ofworld's premier silver over approximately the last century, and the Los Gatos Project is located inmining regions: the Mexican Silver Belt, which was the world’sworld's largest silver producing region in 2011. In2019. Based on a survey published in 2019 by the Fraser Institute, an independent research organization, Mexico is highly ranked among silver mining jurisdictions worldwide in terms of the attractiveness of investment. Mexico also has a long history of successful mineral development and operations, which we believe makes it a desirable jurisdiction in which to conduct mining operations due to stable political, tax and regulatory policies.
Mexico is the largest producer of silver in the world, in addition to being locateda top-10 producer of gold, lead and zinc, among other major commodities. According to the 2019 Fraser Institute survey, Mexico ranks ahead of many countries in premier silver regions, both assets possess characteristics that differentiate them from other silver projects:
Sunshine Mine Property
Oneterms of the highest-grade known remaining primary-silver discoveries worldwide, estimated to contain 2,880,312 tonnes of mineralized material at an average silver grade of 781.7 grams/Tonne (inclusive of expectedinvestment attractiveness for mining, dilution)
The recently-completed Sunshine Mine Technical Report and Preliminary Economic Assessment indicates a robust silver project with potential for near-term significant production and cash flow
Silver-bearing concentrate production expected to commence in late 2014
Significant existing infrastructure, including an operational primary shaft that is being modernized and upgraded, a secondary shaft that is being refurbished, access to roads, power and water, and all material permits to begin mining, with the exception of applicable construction permits
Consolidated land position of approximately 3,901 hectares representing the ability to allow drilling access from surface locations to newbut behind certain areas of potential mineralization that remain highly prospective with new veins and vein extentions discovered since the 2011 exploration program began
Strong community support coupled with an experienced and skilled workforce, including deep underground Idaho Silver Valley experience
A prolific past-producing mine, once one of the largest silver producers in the United States, whichU.S., Canada and Australia. In the mining sector, foreign ownership of Mexican companies is estimatednot subject to have produced over 365 million ounces of silver
Underexplored geological structure with significant upside potential, as evidenced byrestrictions. The Mexican government is focused on improving infrastructure, primarily in the continuing discovery of new veins throughout the Idaho Silver Valley
Los Gatos Project
Control overpower grid and the ability to develop an emerging silver region; land position of 149,083 hectaresroad networks.
The Cerro Los Gatos deposit is estimated to contain 5,270,000 tonnes of mineralized material at an average grade of 179 grams/Tonne silver, 2.0% lead and 4.2% zinc; the Esther deposit is estimated to contain 620,000 tonnes of mineralized material at an average grade of 113 grams/Tonne silver, 0.6% lead and 1.7% zinc; and the Amapola deposit is estimated to contain 480,000 tonnes of mineralized material at an average grade of 101 grams/Tonne silver, 0.1% lead and 0.2% zinc (undiluted in-situ)
Demonstrated lateral continuity and thickness of mineralization
Widespread mineralization beyond the Cerro Los Gatos, Esther and Amapola zones, with 10 other priority targets
More than 85% of land position yet to be drilled
Supportive local community and state government and well tested legal and land tenure system
Sunshine Mine Historical Production and Recent Accomplishments Enhance Operating SuccessSite Exploration Potential Provides Opportunity for Significant Resource Conversion Beyond Existing Mine Plan
Sunshine Silver believes We believe that the significant historical production at the Sunshine Mine, combined with the recent and planned mine improvements, lowers project risk and enhances the likelihood of operating success of the project. Significant time and capital investment will be required before the Sunshine Mine returns to production and the Company anticipates that it will continue to incur operating costs without realizing any revenues at the Sunshine Mine until at least 2015, including costs related to intensive underground exploration, rehabilitation and refurbishment of mine and processing infrastructure and further dewatering of underground workings. The underground workings of the Sunshine Mine consist of multiple levels developed off the main production shaft, extending from the surface to a depth of over 1,825 meters, or more than 1,000 meters below sea level.
Since acquiring the Sunshine Mine, the Company has acquired additional surface rights and improved the existing infrastructure, repaired surface facilities and equipment and completed a number of environmental, health and safety upgrades and identified and accessed a newly discovered portion of the resource that could be mined in the near future. The Company has added experienced and highly-trained professionals to lead such improvements. The Company has accomplished the following for the Sunshine Mine:
Initiated and expanded exploration drilling
Discovered an extension of the Sunshine Vein across the Chance Fault, an extension of the Yankee Boy Split Vein and the new “10” vein
Retained project engineering and development managers
Engaged geologic resource, metallurgical, environmental, hydrologic and mine planning consultants
Initiated metallurgical design work for a new process plant
Initiated a third party concentrate marketing study for silver-bearing concentrates
Managed the completion of a 3D block model for the first time in the mine’s history
Started modernizing the Silver Summit shaft and mined two declines for exploration platforms and access within the mine
Completed an independent technical report in accordance with NI 43-101 and the requirements of Industry Guide 7
Completed a preliminary economic assessment, which indicated mineralized material production could begin in the second quarter of 2014
Significant Exploration Potential for Additional Silver Resources
Sunshine Silver believes that itsour properties have significant exploration upside with numerous opportunities to define additional mineral resources through continued exploration of its properties:exploration.
The Los Gatos District is located in the Mexican Silver Belt, near several other silver assets owned by large public companies. The Mexican Silver Belt has experienced significant exploration success, and the Los Gatos District represents an underexplored property where there has been little historical workings or previous exploration. The Los Gatos District contains numerous significant high-grade targets throughout. Previous work done has resulted in a 190% increase in measured and indicated silver equivalent resources from March 2014 to September 2019, with additional exploration planned using proceeds from this offering.
Sunshine Mine: SunshineTable of Contents
Cerro Los Gatos Mine Measured & Indicated Ore Tonnage (Mt) and Silver has rights to approximately 3,901 hectaresGrade (g/t) (100% Basis)
Mineral resource estimates presented include mineral reserves. Based on a cut-off grade of exploration ground150 grams silver equivalent/tonne at assumed metal prices of $18.00/toz silver, $0.92/lb lead and $1.01/lb zinc; gold was not considered in silver equivalent calculation. The mineral resource estimates contained in the SunshineLos Gatos Technical Report have an effective date of September 6, 2019. The mineral resource estimates contained in the Los Gatos Technical Report are presented on an undiluted basis without adjustment for metallurgical recovery. Mineral reserve estimates and mineral resource estimates contained in the Los Gatos Technical Report have different effective dates and are based on different dilution and recovery factors and cut-off grades. For a discussion of the mineral resource estimates contained in the Los Gatos Technical Report, including mineral resource estimates exclusive of mineral reserves, see "—The Los Gatos District—Mineral Resource Estimates—Cerro Los Gatos Mine, property.Esther and Amapola Deposits."
The property has numerous well-defined exploration targets, many of which are extensions of past-producing silver veins. In addition, Sunshine Silver has acquired additionalLGJV owns the surface rights to further consolidate its ownership of this mineralized trend. Despite being a prolific silver producing region, Sunshine Silver believes that the Coeur d’Alene Mining District is still highly under explored. Through application of modern exploration technologies and processes, Sunshine Silver has discovered an extension of the Sunshine Vein across the Chance fault and several other high-grade veins and vein extensions.
Los Gatos Project: Sunshine Silver expects to expand5,479 hectares covering the Cerro Los Gatos Mine and the Esther and Amapola deposits and the Gavilana (Paula) and San Luis zones, and has been granted mineral concessions for all 103,087 hectares, with 17 contiguous concessions in the Los Gatos District. We have identified 14 mineralized zones within the concessions. Of the 14 mineralized zones, the LGJV has established mineral resource estimates only at the Cerro Los Gatos Mine, the Esther deposit and the Amapola deposit and has conducted drilling on only 15 kilometers out of a strike length of over 150 kilometers of quartz veining along the Los Gatos District.
Mineralized Zones Grade Intercepts
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 | |||||||||
The table above does not include Ocelote and Wall-E/Ava zones, as they do not have sufficient drilling.
The current resources are significant, but we believe that additional resource potential remains in the immediate area. Drill testing of other high-priority targets within the Los Gatos District has been relatively limited given our focus on delineation of reserves at, and construction of, the Cerro Los Gatos Mine. As a result, the highly prospective Los Gatos District remains underexplored. Drilling at the Esther deposit to date has demonstrated good grade continuity along the system and characteristics similar to that identified during preliminary work at the Cerro Los Gatos Mine. Following potentially positive results from infill drilling at the Esther and Amapola deposits, we expect to update the resources and perform a scoping study to determine if these two deposit areas could generate economic production, representing further upside potential for the broader Los Gatos District.
We expect to perform additional definition drilling to expand the Southeast and Northwest zones of the Cerro Los Gatos Mine and to perform additional drilling to expand the Esther and Amapola deposits, which remain open to extensions at depth. Sunshine Silver also hasIn addition to the Cerro Los Gatos Mine, the Esther deposit and the Amapola deposit, we have identified 1011 other priority targets. Sunshine Silver hasonly conducted drilling on 15 kilometers out of over 100 kilometers of strike length of quartz veining alongmineralized zones defined by high-grade drill intersections in the Los Gatos Project property’s 149,083 hectares.District.
Other opportunities: Sunshine Silver owns 21 other exploration propertiesIn addition to the Los Gatos District, we have 100% control of the Santa Valeria property, located in Chihuahua, Mexico, which is comprised of 1,543 hectares and Idaho, which could provide additionalfurther opportunities for resource growth.
Politically Stable and Mining-Friendly Jurisdictions
Both Idaho and Mexico are jurisdictions with a long history of successful mineral development and operations. Both are considered desirable jurisdictions in which to conduct mining operations due to stable political, tax and regulatory policies. Based on a survey published in February 2012 by the Fraser Institute, an independent research organization, Idaho and Mexico rank among the top silver mining jurisdictions worldwide in terms of the attractiveness of government policies, access to infrastructure and qualified labor availability. We believe they are two of the top jurisdictions for mining investment. A number of jurisdictions other than Idaho and Mexico with silver production recently have had issues with local government, including substantial increases in mining taxes, government revocation of mining licenses and restrictions on foreign ownership. These have occurred in jurisdictions such as Peru, Chile, Argentina, Bolivia, Poland, Russia, China and Australia. According to Ernst and Young inBusinessRisksFacing Miningand Metals,resource nationalism is the number one business risk facing mining and metals investment for 2012-2013.
Attractive Market Dynamics
Investment demand for silver exposure remains strong, driven in part by continuedvolatility in the U.S. dollar, weakness, ongoing economic uncertainty in Europe and political unrest in the Middle East and elsewhere. Historically, silver has been viewed as an effective hedge against a decrease in the value of the U.S. dollarcurrency and inflation, attracting investors during times of uncertainty. In addition, industrial demand for silver continues to increase, driven by new emerging applications for silver such as solar energy, medical applications and water purification, which the Company believes willwe believe enhance the strong supply and demand fundamentals of silver.
Despite this strong investment and industrial demand, the universe of primary silver companies is small, which limitshas created a scarcity of investor options for silver exposure. Sunshine Silver represents anWe believe we represent a highly attractive opportunity for investors to gain exposure to a primary silver company with two attractiveworld-class assets.
Experienced Management Team and Board of Directors
Sunshine Silver has We have an experienced and growing management team with a track record of successfully identifying and developing mineral discoveries. The Company’s Executive Chairman &Our Chief Executive Officer, Stephen Orr, has 3543 years of experience in the minerals industry principally with Homestake Mining Company,
where he ultimately served as Presidentpresident of Homestake Canada Inc.; Barrick Gold Corporation, where he was Managing Directormanaging director of Australia & Africa operations; OceanaGold, Limited, where he served as Chief Executive Officer;chief executive officer; and Ventana Gold Corp., where he was Presidentpresident & Chief Executive Officer. The Company’schief executive officer. Our Chief Financial Officer, Roger Johnson, has 3341 years of experience in financial management of the minerals industry with Coopers & Lybrand, as a public accountant; Kennecott Utah Copper Corporation,LLC, as Vice President, Controller;vice president, controller; Pasminco Zinc, Inc., as Senior Vice President, Financesenior vice president, finance and Administration;administration; and Newmont Mining Corporation, where he was Vice President, Chief Accounting Officer. The Company’s Chief Operating Officer, John Galassini, has 25 years of experience in the minerals industry with Phelps Dodge Corporation, where he ultimately served as Senior Vice President North America; Freeport McMoRan Copper & Gold, Inc., as Senior Vice President; and Kinross Gold Corporation, where he served as Regional Vice President North America. The Company’svice president, chief accounting officer. Our Vice President of Exploration Philand Chief Geologist, Philip Pyle, has 3341 years of experience in the minerals industry with Linear Gold (now Brigus)Fortune Bay Corp.), where he served as Explorationexploration manager, and at MIM Exploration Pty Ltd, BHP Minerals International Exploration and AMAX Exploration.Exploration Inc. He served as Vice President Exploration forvice president exploration at Los Gatos Ltd. since 2008. The Company’sOur VP Investor Relations, Monica Brisnehan,Operations, John Kinyon, has 1640 years of capital markets and mineralexperience in the minerals industry, experience, including as Directorvice president and general manager at Coeur Mining Inc.'s Kensington Mine, general manager of Investor RelationsYukon Zinc's Wolverine project, vice
president operations at Newmont MiningOceanaGold's New Zealand operations and general manager of Eskay Creek at Barrick Gold Corporation.
The Our Board of Directors is comprised of senior mining and financial executives who have broad domestic and international experience in mineral exploration, development and mining. The Company’s senior management andOur Board of Directors has been established with individuals who have in excess of 300 years of combinedcareer backgrounds at notable mining experience. Sunshine Silver believescompanies. We believe that the specialized skills and knowledge of the management team and of the Board of Directors will significantly enhance Sunshine Silver’sour ability to explore and develop the Sunshine Mine property and the Los Gatos ProjectDistrict and to pursue other regional growth opportunities.
Mr. Pyle, Vice President of Exploration and Chief Geologist, and Mr. Huerta, Project Director at the Cerro Los Gatos Mine, are fluent in English and Spanish, have extensive experience with carrying out business activities in Mexico and are familiar with the culture and business practices in Mexico. Mr. Pyle, for example, has been travelling to Mexico on business for more than 30 years, 11 years of which were on a monthly basis. While our key management meetings are in English and our books and records are in English, all key local management members are fluent in English and Spanish, Dowa's upper management all speak English and our auditors operate in Spanish as needed. Further, our contracts that relate to our business operations in Mexico are prepared in both English and Spanish by lawyers who are fluent in both languages, with translations undertaken as needed.
See "Management" for additional information.
Shareholder SponsorshipSupport
The Company and its predecessors We were founded by affiliates of The Electrum Group LLC whichand certain of its affiliates. Electrum is an investment advisor whose team, led by Dr. Thomas S. Kaplan, has historically focused on making strategic investments in precious metals resources and hydrocarbons. The Company believesElectrum has a demonstrated track record of successful natural resource investments and more than 20 years of experience investing in the metals and mining sector. We believe that access to the specialized skills and knowledge within Electrum will significantly enhance Sunshine Silver’sour ability to execute itsour business strategy.
Los Gatos Ltd. was founded by Electrum in April 2006. Prior to the merger of Los Gatos Ltd. with and into the Company in March 2011, Electrum principally funded the activities of Los Gatos Ltd. In addition, pursuant to a services agreement effective January 1, 2008, Tigris Financial (International) L.P. provided services consisting primarily of business and financial advice with respect to the strategic business development and corporate finance activities of Los Gatos Ltd. and its subsidiaries. This agreement was terminated on August 1, 2011.
Precious Metals Opportunities LLC, our predecessor, was founded by Electrum in December 2009. Prior to the merger of Los Gatos Ltd. with and into the Company in March 2011, Electrum funded the activities of the Company. Prior to Mr. Orr and Mr. Johnson joining us in 2011, Electrum employees served as our officers and directors and were responsible for the management of all aspects of our business including the acquisition of the Sunshine Mine and our financing activities infrom March through June 2011. In addition, pursuant to a services agreement, effective May 11, 2010, between Silver Opportunity Partners LLCThomas S. Kaplan, Chairman and Tigris Financial Group Ltd. (which was assigned by Silver Opportunity Partners LLC to the CompanyChief Executive Officer of Electrum, Igor Levental, President of Electrum, and was later terminated on December 31, 2011), and a services agreement, effective March 1, 2011, between the Company and Tigris Financial Group, Ltd. (which was terminated on August 1, 2011), Tigris Financial Group Ltd. had provided services to the Company and its subsidiaries, including: general business; investment, management and/or financial advice; internal bookkeeping services; general administrative services; network and communications services; supervision of outside service providers; and other services as requested from time to time. William Natbony, formerAli Erfan, Vice Chairman of Tigris Financial Group Ltd., serves as a memberElectrum, are members of ourthe Company's Board of Directors.
In March 2011, Liberty Metals & Mining purchased 15% MERS is an independent, professional retirement services company that was created to administer the retirement plans for Michigan's local units of the Company’sgovernment on a not-for-profit basis. The team at MERS is made up of top industry experts who use fiscal best practices to give members peace of mind and security in their retirement. From July 2015 through July 2019, MERS acquired 19.5% of our common stock. Liberty Metals & Mining is a wholly-owned subsidiary of Boston-headquartered, Liberty Mutual Group. As of
December 31, 2012, Liberty Mutual Group had approximately $78 billion of total invested assets. As a subsidiary of Liberty Mutual Group, Liberty Metals & Mining makes investments in the metals and mining sector for Liberty Mutual Group.
Prior to Liberty Metals & Mining’sMERS's purchase of the Company’sour common stock, the Companywe had no business relationship with Liberty Metals & Mining. Diana Walters, President and Chief Executive OfficerMERS.
Table of Liberty Metals & Mining, serves as a member of our Board of Directors.Contents
The current shareholder structure, which does not give effect to the Reorganization, is depicted below:
Following the completion of this offering and after giving effect to the offering,Reorganization, Electrum and Liberty Metals & Mining willMERS are expected to beneficially own approximately % and % of the Company’sour outstanding common stock, respectively, assuming the over-allotment option is not exercised by the underwriters, and both Electrum and Liberty Metals & Mining will continue to have a presence on the Board.
In addition to Electrum and Liberty Metals & Mining, the Company’s institutional shareholders include Tocqueville Asset Management, LP and Ospraie Management, LLC.Board of Directors.
Sunshine Silver’s Our business strategy is focused on creating value for stakeholders through the ownership and advancement of its two principal projects, projects—the SunshineCerro Los Gatos Mine property and the Los Gatos Project, District—and through the pursuit of similarly attractive silver-focused projects. Sunshine Silver expects to commence concentrateThe LGJV commenced production at the SunshineCerro Los Gatos Mine in late 2014. Sunshine Silver does not expectthe third quarter of 2019. We intend to enter into productionachieve these objectives through the following value-enhancing near-term and long-term initiatives:
We expect that we will require additional funding at a later date to construct a refinery at the Sunshine Mine, to bring the Sunshine Mine into sustained commercial production and to develop a mine at the Los Gatos Project.
Sunshine Silver plans to:
Continue Exploration and Development at the Sunshine Mine Property, Potentially Convert Existing Mineralized Material to Reserves and Expand the Resource Base
The Company intends to continue with its surface and underground exploration drilling program to provide sufficient sampling to estimate grade, tonnage and location of additional potentially economic veins and deposits for future production and to upgrade mineralized material to reserves. In addition, Sunshine Silver may complete a feasibility study at the Sunshine Mine property to determine the costs to re-commission and operate the Sunshine Mine as a sustainable and efficient silver producer. If Sunshine Silver deems it necessary or appropriate to do so, it expects this study will take six months to complete.
Re-Commission the Sunshine Mine to Long-Term Sustainable Production
Sunshine Silver intends to upgrade or replace existing infrastructure at the Sunshine Mine in connection with its modernization and rehabilitation efforts and to review process optimization alternatives. The re-commissioning of the Sunshine Mine will be designed to allow the Company to reach a safe and sustainable production rate utilizing its newly optimized facilities.
Advance Developmentportion of the Los Gatos Project and Accelerate ExplorationWorking Capital Facility: The Los Gatos Working Capital Facility provided by Dowa to the LGJV carries an annual interest rate of LIBOR plus 3%. In addition, we are 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 during the relevant fiscal quarter. Acquiring or retiring a portion of the Los Gatos Working Capital Facility will reduce our borrowing costs.
We intend to exercise our right to repurchase an 18.5% interest in the LGJV from Dowa, increasing our ownership to approximately 70.0%. The Company plans to accelerate its exploration programoption expires in June 2021 and represents an attractive investment opportunity that we believe is immediately value-accretive. With increased ownership, we will further benefit from the ramp-up in production at the Los Gatos region through additional drilling with the intent of identifying additional mineralized material within the established ten additional target areas. In the near term, the Company also intends to progress the most advanced exploration sites, the Cerro Los Gatos Mine, supported by the attractive cash flow generation profile and fully funded nature of the project. In addition to increasing our economic interest in the Cerro Los Gatos Mine, we expect that this repurchase will also provide us with greater exposure to potential upside from additional exploration within the Los Gatos District, in particular the Esther and Amapola zones, through additional in-fill and stepout drilling (expected to recommencedeposits. Following this increase in our ownership interest in the second quarter of 2013), beginning decline development (expectedLGJV, we will continue to commencenot exercise control over the LGJV due to certain provisions contained in the first quarterUnanimous Omnibus Partner Agreement that currently require unanimous partner approval of 2014)all major operating decisions (such as certain approvals, the creation of security interests on
property, any initial public offering of the joint venture, and completionlitigation settlements). See "—The Los Gatos District—Unanimous Omnibus Partner Agreement" for more information.
paste plant, the expansion of an underground pumping well gallery, additional capacity construction of the tailings storage facility and other various strategic capital needs. At this time, we are not obligated or committed to making these expenditures.
Sunshine Silver plans We intend to expand itsfund our pro rata share of an exploration programs at its Mexican properties outsideprogram to further define resources in the partially defined Esther deposit to confirm the multiple deposit potential of the Los Gatos regionDistrict.
Summary of Mineral Resources and continue to grow its land position. Mineral Reserves
Below is a summary table of estimated mineral resources and reserves. Further information can be found in the following sections: "—The Company owns or controls a portfolioLos Gatos District—Mineral Resource Estimates—Cerro Los Gatos Mine, Esther and Amapola Deposits" and "—The Los Gatos District—Mineral Reserve Estimates—Cerro Los Gatos Mine."
Table of 19 other exploration properties in Mexico covering an areaContents
Summary Mineral Resources Inclusive of 420,895 hectares, with significant additional hectares under application for mineral concession. These other exploration properties consistMineral Reserves as of the following:Effective Date of the Los Gatos Technical Report
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| | 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 | |||||||||||||||||||||||||
Sunshine Silver also plans to expand its exploration programs at its Idaho properties outside the Sunshine Mine property and continue to grow its land position. The Company owns or controls a portfolio of two other exploration properties in Idaho covering an area of 2,457 hectares. These other exploration properties consist of Eastern Silver Belt and Falls Creek.Contents
IdentifySummary Mineral Reserves as of the Effective Date of the Los Gatos Technical Report
| | 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 | |||||||||||||||||||
Reserves based on a $75 NSR cut-off value. NSR is defined as revenue per tonne mined less the sum of concentrate refining, treatment and Pursue Other Growth Opportunitiestransportation costs per tonne mined. The mineral reserve estimates for the Cerro Los Gatos Mine reflect diluted grades with adjustment for metallurgical recovery. The mineral reserve estimates contained in the Los Gatos Technical Report have an effective date of July 1, 2020 and exclude 655,746 tonnes of material that Add Value to Stockholdershas been mined through June 30, 2020. Mineral reserve estimates and mineral resource estimates contained in the Los Gatos Technical Report have different effective dates and are based on different dilution and recovery factors and cut-off grades. For a discussion of the mineral reserve estimates contained in the Los Gatos Technical Report, see "—The Los Gatos District—Mineral Reserve Estimates—Cerro Los Gatos Mine."
Given the management and Board’s strong track record in exploration, development and asset integration, the Company may pursue acquisitions and joint ventures that are value accretive to its stockholders through the pursuit of similarly attractive silver-focused projects.
The Sunshine Mine Property
The technical information appearing below concerning the Sunshine Mine property, including estimates of mineralized material, was derived from the reports of Tetra Tech MM, Inc. and MTB Project Management Professionals, Inc., independent mining consultants.
Location of the Sunshine Mine Property
The Sunshine Mine property is located within the Coeur d’Alene Mining District in Northern Idaho. Most of the district’s production has come from within a 24.1 kilometer-long band from the Bunker Hill mine to the Galena mine. The Sunshine Mine is approximately in the center of the Bunker Hill and Galena Mine belt. The Sunshine Mine property includes both owned and leased properties containing 200 patented mining claims and 386 unpatented mining claims, for a mineral rights position of approximately 3,901 hectares.
The Sunshine Mine property is approximately 60 kilometers east of Coeur d’Alene along U.S. Interstate 90. The Jewell Shaft, the mine’s main shaft, is located in the Big Creek Valley at Latitude 47°, 30’, 6” North, Longitude 116°, 4’, 10” West, near the base of a steep hill that lies to the east. The Mine’s infrastructure is located in proximity to the Jewell shaft. Access to the Sunshine Mine property from Coeur d’Alene is by I-90 east to the Big Creek turnoff and then south on about 4.0 kilometers of secondary paved road to the Sunshine Mine site. The nearest town is Kellogg, Idaho, which is about 7.2 kilometers from the Mine.
Ownership and Properties
In May 2010, the Company acquired from Sterling, through Sterling’s bankruptcy proceedings, the majority of the operating facilities and equipment at the Sunshine Mine, including a lease on the Sunshine Mine that included a purchase option for title to the Sunshine Mine. In July 2010, the Company closed the purchase option in the lease to obtain title to the Sunshine Mine and acquired the remaining operating facilities and equipment.
The Sunshine Mine property also includes the Metropolitan, Chester, Bismark and Mineral Mountain properties that are leased by the Company.
The following table sets out the various property rights that comprise the Sunshine Mine property:
Property | Owner | Patent Claims | Unpatented Claims | Hectares | ||||||||||
Sunshine | Sunshine Silver | 165 | 118 | 1,746 | ||||||||||
Metropolitan | Metropolitan Mines Corporation | 2 | 70 | 413 | ||||||||||
CAMP Project | Sunshine Silver (below 274 meters below sea level) | 20 | 12 | 163 | ||||||||||
Chester | Chester Mining Company | 6 | 0 | 43 | ||||||||||
Bismark | Chester Mining Company | 3 | 0 | 25 | ||||||||||
Mineral Mountain | Mineral Mountain Mining and Milling Company | 4 | 0 | 18 | ||||||||||
Sun South | Sunshine Silver | 0 | 158 | 1,259 | ||||||||||
Silver Hill | Sunshine Silver | 0 | 28 | 234 | ||||||||||
Total | 200 | 386 | 3,901 | |||||||||||
Sunshine and CAMP Project
The Company owns 185 patented and 130 unpatented mining claims covering 1,909 hectares at the Sunshine Mine property, including the CAMP Project claims below 274 meters below sea level. This property includes the Sunshine Mine and mill, the Jewell shaft, surface facilities, a tailings impoundment area and extensive underground workings, including shafts, levels, raises and ramp systems, extending to a depth of over 1,825 meters. The property also includes the ConSil mine and mill and related buildings and equipment. Exceptelsewhere in this paragraph and where the context otherwise requires, when describing the Sunshine Mine property in this prospectus we include the leases set forth below.
Metropolitan
The Metropolitan property consists of 2 patented and 70 unpatented mining claims covering 413 hectares. These claims lay immediately to the south of the primary workings of the Sunshine Mine and immediately to the west of the ConSil mine. At depth the claims intersect several veins that were historically mined from the Sunshine Mine.
Other Sunshine Properties
In addition to the Sunshine, CAMP Project and Metropolitan properties, the Company leases other claims representing 13 patented claims covering 86 hectares and 186 unpatented claims covering 1,493 hectares.
Royalties
Many parts of the Sunshine Mine property are subject to royalties that are payable to parties from whom mineral rights are leased or to others who have a right to royalties on certain areas of the property. Certain of these agreements have royalty payments payable when the Company begins producing and selling metal-bearing concentrate in commercial quantities. These royalties are based on proceeds paid by smelters less certain costs, including costs incurred to transport the concentrates to the smelters, called a net smelter return, or NSR, for ore produced in the property area subject to the royalties.
All royalty payment amounts below are in thousands of dollars.
Sunshine Mine
The Company is required to pay between a 0% (at a silver price below $6 per ounce) and 7% (at a silver price of $10 per ounce or higher) NSR royalty under a settlement agreement with the U.S. government and the Coeur d’Alene Indian tribe. All funds from the royalty must be used to pay for the remediation, restoration and other actions to address certain environmental damage to the Coeur d’Alene River and other natural resources located in the Idaho Silver Valley. The area subject to the royalty covers substantially all of the Sunshine Mine property, owned or leased by the Company, and extends outward within a one mile boundary of the property as set forth in the settlement agreement, which includes the leases set forth above under “—Ownership and Properties.” The Company is also required to pay between a 2% (at a silver price below $5 per ounce) and 4% (at a silver price of $7 per ounce or higher) NSR royalty to Hecla Mining Company. The area subject to this royalty surrounds the Silver Summit/ConSil Mine.
Metropolitan Mines Corporation Mining Claims
The Company’s lease with Metropolitan Mines Corporation requires the Company to pay advanced royalties of $12.0 annually until such time as ore is produced from the Metropolitan property. Upon ore production, Metropolitan Mines Corporation is to be paid either 16% or 50% of the net proceeds from the sale of materials produced from the ore processed from these claims, depending upon the location of production.
Chester Mining Company Mining Claims
The Company’s lease with Chester Mining Company, or CMC, requires the Company to pay an advance royalty of $7.2 annually until such time as an NSR royalty of 4% or royalty of 20% of net profits on ore processed is payable. The net profit royalty is in lieu of and not in addition to the advance royalty and the NSR royalty. The lease also provides CMC with the option to acquire a 20% working interest in all ores, concentrates, metals or other mineral substances produced from the property. CMC may exercise this option by releasing the Company from its obligation to pay the 20% net profits royalty and by tendering an amount of cash equal to 20% of the then-current working capital fund. The initial lease term ends in 2029 and is renewable for an additional 25 years.
Mineral Mountain Mining Claims
The Company’s lease with Mineral Mountain Mining and Milling Company, or Mineral Mountain, requires the Company to pay a royalty of $3.6 annually or a royalty of 3% of net profits, if net profits from the ore processed from these claims exceeds such amount. The lease also provides Mineral Mountain with the option to acquire a 3% working interest in all ores, concentrates, metals or other mineral substances produced from the property. Mineral Mountain may exercise this option by releasing the Company from its obligation to pay the 3% net profits royalty and by tendering an amount of cash equal to 3% of the then-current working capital fund. The initial lease term ends in 2029 and is renewable for an additional 25 years.
Infrastructure, Climate and Topography
The Sunshine Mine property has a mild, northern-U.S. climate with snow, rain and fog in the winter. The Sunshine Mine property is tied into the regional power grid, water is abundant from Big Creek, and there are sufficient sources of manpower. Adequate waste disposal areas are present at both the Jewell and the Silver Summit shaft areas. A tailings pond is located on the property. The Company expects that the capacity of the tailings pond as currently configured will be sufficient for approximately ten years after commercial production resumes and that additional capacity may be added thereafter by increasing the height of the pond dam. Mineralized material processing facilities are located on site and will be refurbished or replaced. The topography is typical of northern Idaho’s countryside, hilly to mountainous and forested. The Sunshine Mine property is at an approximate elevation of 790 meters above sea level. The Jewell Shaft is located above the base of a very steep mountain, while the hoist room and other infrastructure facilities are located on a relatively level area of property at the mountain base. The Company is still evaluating potential smelting locations, related transportation and smelting contract terms for the Company’s future production.
Geological Setting
The Coeur d’Alene Mining District is hosted by the rocks of the Pre-Cambrian Belt super group. These sedimentary rocks were deposited approximately 1.6 billion years ago. At various times these rocks were faulted, leached, altered and re-mineralized. The Belt super group has been divided into the Pre-Ravalli group, Ravalli group, Piegan group and Missoula group. Within the District, rocks of the Pre-Ravalli, Ravalli, Missoula and Piegan groups can be found. The formations comprising the Ravalli group are, listed from oldest to youngest, the Burke, Revett, and Saint Regis Formations. The District has a history of intense faulting and folding of these rock formations. Two major east-west fault zones, the Osburn and Placer Creek faults, cut through the District.
Mineralized material deposits in the District are localized in the 182.9 meter thick St. Regis Formation and the underlying upper members of the 914.4 meter thick Revett Formation. Four major west-northwest trending faults cut the Sunshine Mine property area, and some have been mapped for several kilometers. The faults dip steeply to the south. The main vein systems at the Sunshine Mine property include the Sunshine, Chester, Copper, Yankee Girl and West Chance veins. Mineralized silver veins are present within a zone approximately 3,810 meters long by 1,524 meters wide and over a vertical distance of 1,890 meters from the surface at 1,036.3 meters above sea level to 853.4 meters below. The mineralization is open at depth below the 1,707 meter Mine level.
The Crescent mine is immediately adjacent to the west and the Coeur d’Alene, Coeur, Galena and Caladay mines are adjacent to the east of the Sunshine Mine. Many of the productive vein structures and faults in those adjacent mines pass directly across the Company’s mineral rights position.
History of the Sunshine Mine Property
The Sunshine Mine, one of the highest-grade known remaining primary silver discoveries worldwide, is estimated to have produced over 365 million ounces of silver. In 1884, the Blake brothers staked the Yankee Lode mining claim, and various contiguous holdings were consolidated to become the Sunshine
Mining Company in 1920. In 1921, operations continued and grew at the Sunshine Mine until it was at full production by the end of 1988. In 1992, Sunshine Mining Company merged into Sunshine Precious Metals, Inc., or SPMI. From 1991-2001, there was limited production at the Sunshine Mine primarily as a result of several factors, including a drop in the price of silver and the lack of regular and consistent exploration and development activities. The Mine eventually ceased production in the first quarter of 2001 and Sunshine Mining and Refining Company, or SMRC, the parent of SPMI, declared Chapter 11 bankruptcy. Sterling acquired control of the Sunshine Mine in 2003 through a lease with SPMI, which included an option to purchase the Mine. Beginning in August 2003, and followed by the initial drilling in the fall of 2004, Sterling began an exploration program, and the process of rehabilitation of the underground areas of the Mine began in 2004. The Sunshine Mine returned to production under Sterling for a short period in late 2007. In 2008, Sterling ceased production and in early 2009 went into bankruptcy, due to, we believe, among other factors, falling silver prices ($10.79 per ounce as of December 31, 2008) and inadequate capital. At that time, SNS Silver Corporation took over care and maintenance of the Mine under contract with SPMI. In May 2010, the Company acquired, through Sterling’s bankruptcy proceedings, the majority of the operating facilities and equipment at the Sunshine Mine, including the lease on the Sunshine Mine from SPMI that included a purchase option for title to the Mine. In July 2010, the Company closed the purchase option in the lease to obtain title to the Sunshine Mine and acquired the remaining operating facilities and equipment.
Exploration
The Sunshine Mine is without known reserves and the proposed program is exploratory in nature. There are 3,536 historic underground drill holes on the Sunshine Mine property. The longest underground hole is approximately 914 meters. Long underground exploration holes are required to locate structures and veins because most development, except in the West Chance deposit, has been on the vein structure themselves and thus drilling platforms for shorter holes at appropriate angles to the targets have not been available. Historic exploration was primarily constrained by legal property boundaries. Potential targets were also never explored due to limited availability of drills, lack of supporting infrastructure, lack of physical access to provide suitably located drill stations and prohibitive depths from the surface. With the consolidation of the land position, long-known but previously unexplored target areas can now be explored, although some target areas will require new drifting and new drill stations cut.
The Company is undertaking significant exploration and re-development of the Sunshine Mine property that will require significant time and capital before the property returns to production. The objectives of the current exploration program at the Sunshine Mine are to discover new high-grade veins and mineralized material shoots in areas that already have nearby development, to explore for new large veins in unexplored or under explored areas and to systematically extend known mineralized areas. Since initiating drilling in April 2011, the Company has complete 41 drill holes totaling 15,190 meters as of June 4, 2012. The primary focus of the drilling from the Sterling Tunnel has to been to follow up on open ground within the Sunshine Vein system, while also exploring the Yankee Girl Vein. During the process a new vein structure was identified west of the Sunshine Vein system, referenced as the West Chance Link Vein, with all 16 drill holes revealing significant mineralization. Accessed from the Sterling Tunnel, the Company believes mining of the West Chance Link Vein could begin in a matter of months. The West Chance Link Vein is a linking structure between the Sunshine Vein and West Chance Vein. Additionally, in-fill drilling open ground above the Sterling Tunnel elevation, about the Sunshine Vein, has also identified a new vein structure referenced as the South Yankee Boy Split.
Since acquiring the Sunshine Mine, the Company has successfully completed or is currently working on the following significant re-development activities at the Sunshine Mine property:
acquired additional surface rights (2010);
repaired surface facilities and equipment, including the Jewell hoists and shaft, and compressed air, water and pumping systems;
ongoing repairs to the Jewell shaft;
commissioned the Silver Summit hoist and completed work to enable rehabilitation of the Silver Summit shaft;
re-established utility services to the Sunshine Mine ramp, enabling commencement of improvements required for ventilation and re-access to mining blocks;
completed a drill hole database review for areas of immediate exploration and began compiling the entire historical geologic database to create a three dimensional model of the resources;
designed a new development plan to re-establish access in the upper and lower Sunshine Mine levels for exploration and development;
completed an independent technical study in accordance with NI 43-101 and the requirements of Industry Guide 7;
completed an NI 43-101 compliant preliminary economic assessment to determine the costs to re-commission and operate the Sunshine Mine as a sustainable and efficient silver producer;
defined additional mineralized material through surface and underground exploration;
advanced the excavation of the Sterling Tunnel decline to access upper level mineralized blocks for future mining; and
completed repairs and improvements to the Silver Summit headframe and Consil adit.
The Company’s objectives at the Sunshine Mine property through 2013 and 2014 are to:
continue to define additional mineralized material through expanded surface and underground exploration;
complete the upgrading of the Jewell shaft;
upgrade the Silver Summit shaft to provide a secondary access to certain underground levels;
complete a feasibility study if we deem it necessary or appropriate to do so;
develop sufficient stope access to return the mine to production;
commence mining in the upper portions of the mine;
complete the construction of a new modern ore processing facility that will produce silver-bearing concentrates; and
upgrade other existing infrastructure and re-establish access to developed portions of the resource.
Sunshine Mine Mineralogy
Over 30 veins have been named and mined at the Sunshine Mine property. The main productive vein systems in the property include the Sunshine, Chester, Polaris, Copper, Yankee Girl, West Chance, West Chance Link and South Yankee Boy Split veins. The Sunshine Vein and Chester Vein are each estimated to have produced over 90 million ounces of silver to date. Major veins strike east-west and typically dip about 65% to the south. Locally, dips range from 45º to 90º. Vein strike lengths are up to 610 meters, with dip lengths two to three times greater than that of the strike length. Major veins are located between the regional and property-wide faults at an angle of about 25º to the bounding faults. Veins vary in width from a few inches to over nine meters, but are generally between 0.3 to 1.5 meters thick. Typically, the Sunshine Mine mineralized material consists principally of tetrahedrite and galena. Tetrahedrite occurs as very fine grains in fracture filings, veinlets or discontinuous blebs in the vein-filled faults. This silver-bearing tetrahedrite is more properly called freibergite and contains 3% to 30% silver substituting for the copper in the crystal structure. Gangue minerals are predominantly siderite with lesser amounts of quartz. Galena is present in the West Chance Vein, the Silver Syndicate Vein and the Chester
Hook Vein. Other metallic minerals seen in the gangue are pyrite, arsenopyrite, and, rarely, boulangerite, bournonite, pyrargyrite and magnetite.
Sampling and Analysis
Underground chip samples are collected for daily grade control and for resource estimation. Daily samples are collected underground from drift faces, stope faces, drift backs, drift ribs and raise ribs. Samples are taken by collecting chips in a horizontal channel, left to right, across the mining face. Sampling protocol for channel samples is to collect separate samples of exposed wall rock on both sides of the apparent mineralized vein, and across the mineralized structure or vein samples are collected perpendicular to the mineralized structure. Multiple samples are taken across a face based upon changes in mineralization intensity or composition. Samples are a maximum of 5.0 feet in length. Each sample face has a referenced control distance to an established survey point. After samples are collected, the geologists carry them to the surface where they are secured, inventoried and transported to the assay lab. Drifts on the veins are generally sampled at four to six foot intervals. The analyses from the face samples taken during development and from samples taken as production mining proceeded are the primary sources of data that the Company uses to estimate mineralized material at the Sunshine Mine.
Drilling done at the Sunshine Mine for mineralized material estimation is done with diamond core drills. Core samples are collected through the vein or mineralized structure. Additional core on both sides of the mineralized zone are sampled to characterize waste dilution. No samples taken for assay are greater than five feet; large zones are broken into increments of five feet or less. When core is lost through a mineralized zone the total drill thickness of the zone is used for volume estimation. The portion of a diamond drill hole used to calculate the reserve for a given vein must be corrected to account for the true thickness of the vein at that point. The down hole length of the intercept is multiplied by the sine of the vein angle to the core axis.
It is the drill contractor’s responsibility, subject to the logging geologist’s review, to ensure correct numbering of core boxes and for drill core recovery. The core, coarse rejects and pulps are locked in a secure location and stored. Access will only be available to approved personal. Drill holes will have collar and downhole surveys. All core is digitally photographed with a standard fixed mount camera base, having all core run intervals clearly marked on each box. A standardized paper logging form and standardized rock, mineral and alteration color codes are utilized during core logging procedures. The core is logged in detail, including lithology, structure, alteration, mineralization and bedding forms. Core recovery and rock quality data are included in the log. All structures are measured in relation to the core axis.
After they are collected, core samples, rock chip, channel and select samples are placed in bags with identification tags and are tied closed at the sample site. The bags are marked externally with the same sample identification as the sample tag. The samples are placed in a designated location within the core logging facility until they are transported to the assay lab. The samples and a submittal sheet chain of custody are either transported to the lab by a Company employee, or are picked up directly by a lab representative. The sample tags in the bags and the submittal sheet indicate a unique number for each sample and the chemical elements that are to be analyzed.
Historically, core and underground samples were delivered to the sample preparation facility on-site by the geologist who logged the core or took the sample. The samples were crushed and ground and delivered to the laboratory for analyses. Company employees did all of the sample preparation, analyses and posting of results on-site. Sample preparation includes discussion with supervisors about the interval, splitting of core, sampling and delivery to the laboratory. This chain of custody maintained the sample integrity.
Samples are analyzed by American Analytical Services, a third party contractor, using Atomic absorption (AA) and induced coupled plasma techniques to determine silver, copper, lead, zinc and antimony content. AA silver values assaying over 1,134 grams per ton silver are also fire assayed for silver. The fire assay results are preferentially utilized in all calculations. American Analytical Services performs internal laboratory checks that include duplicate assays for fire and AA assays and additional duplicate assay checks for additional base metals.
Drilling
The current drill database contains approximately 3,536 underground drill holes. Historic core logs with appropriate descriptions exist with the exception of a single surface hole log book, which has been identified as “misplaced” during a past change of property ownership. The historical drill operators were competent and core recovery in the mineralized zone was generally 90% or higher.
The current drilling for exploration, delineation and development conducted at the Sunshine Mine property has been performed with diamond core drills. Down-hole surveys are attempted on all diamond drill holes. The primary survey tool is a REFLEX EZ-AQ multi-shot down-hole survey camera. Core diameters range from 2.7 to 4.8 centimeters. Core recovery is generally very good, exceeding 90 percent. Core recovery can be difficult in certain faulted or shear areas. The diamond drillers will change from wireline tools to conventional tools before encountering proven areas of loss, which significantly improves recovery. Recovery issues do not materially impact the reliability of the results.
To date three new vein structures have been defined with drilling from the Sterling Tunnel elevation. Two new silver-copper veins have been defined in the immediate hanging wall of the historic Sunshine Vein and are named the West Chance Link Vein and the South Yankee Boy Split Vein. Additionally, a new lead-silver vein, named the ”10 vein,” has been recently discovered 61 meters within the footwall of the Sunshine Vein. All veins carry economic silver-copper or lead-silver values. Drilling is continuing to define the vertical and lateral limits of the new vein structures.
Sunshine Mine Mineralized Material Estimate
This mineralized material estimation was completed by Tetra Tech in MicroMine® mining software utilizing data supplied by the Company. Utilizing drill hole and channel assays data, Tetra Tech created best fit vein surfaces and estimated mineralized material along those vein surfaces. Ordinary Kriging was used to estimate 3D points along a string type block model for 38 veins. This mineralized material estimate has been diluted to a fixed mine width of 1.98 meters and is an in situ resource estimate. A base-case cutoff has been applied but no other economic parameters have been considered. All metal recoveries are assumed to be 100%.
Assay data necessary to facilitate this mineralized material estimate was derived from three sources: drill holes, level drift channel samples and stope channel samples. Drill hole assays were provided by the Company from a collated drill hole database, encompassing historic and modern drilling. Level drift channel sampling was digitized from historic level plan maps. Stope channel samples were digitized from historic stope production sheets. Because channel sampling was conducted across true thickness and drill holes were corrected for true thickness, all three data sources were able to be used simultaneously for resource estimation.
To be classified as mineralized material, a block was required to be estimated using data points inside a search range from 27 to 46 meters. Block estimates from this pass were classified as mineralized material if certain minimum data points were met, subject to data type availability on a vein by vein basis.
A secondary Kriging pass was made using a search ellipsoid ranging from 7.6 to 15 meters and requiring a minimum of three samples to estimate. In addition to meeting the search ellipse criteria the block estimate was required to reside within bounding strings. The bounding strings were drawn to limit block estimation along strike from previous mined out areas.
A density of 0.283 cubic meters per tonne (m3/T) is used to convert volumes to tonnage except for the West Chance Vein where a density of 0.269 m3/T was used.
The table below summarizes the mineralized material at the Sunshine Mine property as of December 2012 using a cutoff grade of 342.9 grams per Tonne (g/T). The mineralized material in the table below contains the expected mining dilution and mining losses and does not reflect in-situ grades.
Sunshine Mine Mineralized Material at a cutoff of 342.9 g/T (includes expected mining dilution and losses) | ||||||||
Category | Tonnes | Average Grade (g/T) | ||||||
Total | 2,880,312 | 781.7 | ||||||
The Company is unaware of any environmental, permitting, legal, title, taxations, socio-economic, marketing, political or other relevant factors that could materially affect this mineralized material estimate.
The Los Gatos Project
The technical information appearing below concerning the Los Gatos ProjectDistrict was derived from the Los Gatos Technical Report prepared by Tetra Tech. The Los Gatos Technical Report was prepared by the following qualified persons, each of whom is an employee of Tetra Tech, independent mining consultants.Tech: Guillermo Dante Ramírez Rodríguez, Leonel Lopez, Kira Johnson, Keith Thompson, Kenneth Smith, Luis Quirindongo and Max Johnson. None of the qualified persons who prepared the Los Gatos Technical Report is affiliated with us or any other entity that has an ownership, royalty or other interest in the Cerro Los Gatos Mine or the Los Gatos District.
Location of the Los Gatos ProjectDistrict and Access
The Los Gatos Project, an exploration stage property,District, covers approximately 149,083103,087 hectares in the south-central part of the State of Chihuahua in Northernnorthern Mexico, within the municipality of Satevó. The ProjectLos Gatos District is roughly centered on Latitude 27° 34' 17" N, Longitude 106° 21' 33" W, near the town of San José del Sitio. The Los Gatos District is located approximately 120 kilometers south of the state capital of Chihuahua City and approximately 100 kilometers northwest of the Parral Mining District and immediately northwestmining city of and surrounding the townHidalgo del Parral.
Table of San José del Sitio, within the municipality of Satevó.Contents
San José del Sitio is accessible by a gravelnearly 100% paved road from the turnoff of Federal Highway 24 at the 81 kilometer marker between the cities of Chihuahua and Hidalgo de Parral. The access road can be traveled by any motorized vehicle and has regular bus and supply services to the surrounding communities. The Los Gatos ProjectDistrict area is accessible by a large network of dirt and gravel roads that are used by local owners and lessees to access grazing areas for cattle and local ranches. Northern areas of the Los Gatos ProjectDistrict are also accessible from several gravel roads connecting with Mexican Federal Highway 24 between the 60 kilometer to 81 kilometer markers. In more remote areas, the rolling topography permits easy access by foot into areas where roads do not exist.
There are a limited number of qualified workers in San José del Sitio, but, technical workers (e.g., miners, electricians, mechanics, computer technicians, etc.), heavy equipment and specialized operators can be found in the surrounding area and at Parral, 88 kilometers southeast. Primary and secondary-level technical schools are available in Valle de Zaragoza, and all levels of schooling are available in Parral and/or Chihuahua, each 2.5 hours away by vehicle.
See "Risk Factors—The title to some of the mineral properties may be uncertain or defective, thus risking our investment in such properties" for a discussion of factors or risks that may affect access or title or the right or ability to perform work on the property.
See Section 4.1 of the Los Gatos Technical Report for further specific information of the location of the Los Gatos District.
Mining Concessions
The Los Gatos ProjectDistrict is made up of a series of claim titles covering approximately 149,083 hectares and a series of concession applications for a total surface area of approximately 14,788103,087 hectares. The Company has received a title opinion in relation to the Los Gatos Project from Vázquez, Sierra & Garcia, S.C. dated November 8, 2012. The titled mining concessions are summarized below:
Los Gatos District—Titled Mining Concessions
| Los Gatos Project—Titled Mining Concessions | ||||||||||||||
Concession Name | Title Number | Date Granted | Hectares | Concessionaire | ||||||||||
1 | Los Gatos | 231498 | 3/4/08 | 19,712 | La Cuesta International | |||||||||
2 | Los Gatos 2 | 228950 | 2/22/07 | 10,720 | Minera Plata Real | |||||||||
3 | Los Gatos 3 | 231076 | 1/16/08 | 27 | Minera Plata Real | |||||||||
4 | Mezcalera | 228249 | 10/17/06 | 4,992 | Minera Plata Real | |||||||||
5 | Mezcalera 2 Fracción I | 228929 | 2/21/07 | 39 | Minera Plata Real | |||||||||
6 | Mezcalera 2 Fracción II | 228930 | 2/21/07 | 26 | Minera Plata Real | |||||||||
7 | Mezcalera 2 Fracción III | 228931 | 2/21/07 | 29 | Minera Plata Real | |||||||||
8 | Paula Adorada | 223392 | 12/9/04 | 40 | Grupo Factor | |||||||||
9 | Gavilana | 237137 | 11/19/10 | 10 | Minera Plata Real | |||||||||
10 | Etna | 237167 | 11/19/10 | 45,996 | Minera Plata Real | |||||||||
11 | San Luis | 236908 | 10/5/10 | 16 | Minera Plata Real | |||||||||
12 | La Gavilana Fracción I | 237461 | 12/21/10 | 44 | Minera Plata Real | |||||||||
13 | Los Estados Fracción I | 237694 | 4/25/11 | 9 | Minera Plata Real | |||||||||
14 | Los Estados Fracción II | 237695 | 4/25/11 | 44 | Minera Plata Real | |||||||||
15 | Los Gatos 4 | 238511 | 9/23/11 | 52,597 | Minera Plata Real | |||||||||
16 | San Luis 2 | 238694 | 10/18/11 | 42 | Minera Plata Real | |||||||||
17 | Los Veranos | 238573 | 9/23/11 | 14,740 | Minera Plata Real | |||||||||
18 | San Luis 3 | 240592 | 5/23/12 | 0.01 | Minera Plata Real | |||||||||
|
| |||||||||||||
Total | 149,083 | |||||||||||||
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 | |||||||||
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These concessions are held by a wholly owned Mexican subsidiary of the Company, Minera Plata Real, S. de R. L. de C.V., or MPR. The concessions have a period of validity that ranges between 2054 and 2058. MPR holds the rights In addition to the concessions of Los Gatos and Paula Adorada through exploration agreements with purchase options. These agreements have been duly recordedlisted in the Méxican Public Registry of Mines. Details of these exploration agreements are provided below.
All royalty payments below are in thousands of dollars.
Los Gatos Concession: MPR is required to make semi-annual payments to La Cuesta International (LCI) to obtain ownership of the concession, and is required to make a production royalty payment of 2% net smelter return on production from the Los Gatos concession and 0.5% net smelter return from lands within a one kilometer boundary of the Los Gatos concession. Once total royalty payments reach $10,000, the 2% net smelter return will decease to 0.5%. Once total payments have reached $15,000, the Los Gatos concession ownership will be transferred to the MPR.
MPR has negotiated an agreement in principal with LCI for a cash-out and elimination of the royalty obligation in exchange for payment to LCI of $6,750 and initial payment of US $50, which will be paid once the agreement is finalized. The balance of payment is due and the settlement complete upon the successful completion of an initial public offering by the Company that includes gross proceeds of not less than $150,000. In the event that the offering is not completed before March 31, 2014, the payment amount will increase 8% per annum.
Paula Adorada Concession: MPR may purchase the Paula Adorada concession from Grupo Factor for $500, according to a payment schedule. Once the final payment is made in 2013, the concession will be transferred to MPR with no further ongoing payment obligations to Grupo Factor.
MPR has also filed the following mining concession applications that have not yet been titled by the México Direccion de Minas (the Department of Mines), or DGM:
| Mining Concession Applications Filed | ||||||||
Application Name | File Number | Hectares | ||||||
Los Estados | 39246 | 241 | ||||||
Atenas | 39507 | 14,547 | ||||||
|
| |||||||
Total | 14,788 | |||||||
In addition,table above, there are several small concessions within the Los Gatos ProjectDistrict area that have been cancelled and not yet liberated by the DGM,Dirección General de
Minas, which the Company intendswe intend to apply for once liberated. The Company hasWe have also arranged for permission to enter and perform exploration activities in a number of private land properties in the Projectdistrict area.
These concessions are held by MPR. The concessions have a period of validity that ranges between 2054 and 2062. MPR holds the rights to the concessions of Los Gatos and Paula Adorada subject to the terms of an agreement with the original holder of the concession. These agreements have been duly recorded in the Méxican Public Registry of Mines. Details of these agreements are provided below.
Infrastructure, Royalty and Agreement on Los Gatos Concession
The Los Gatos concession (title 231498) is subject to the terms of an exploration, exploitation and unilateral promise of assignment of rights agreement made between La Cuesta International, S.A. de C.V. and MPR, dated May 4, 2006. Pursuant to this agreement, title to the Los Gatos concession was transferred to MPR and in connection with the transfer MPR is required to make semi-annual advanced royalty payments of $20,000 to La Cuesta International, S.A. de C.V. until the commencement of commercial production and thereafter is required to pay a 2% net smelter returns royalty on production from the Los Gatos concession and a 0.5% net smelter returns royalty from lands within a one-kilometer boundary of the Los Gatos concession, subject to a minimum royalty payment in the same amount as the advanced royalty payment. Once total royalty payments reach $10 million, the 2% net smelter returns royalty will decrease to 0.5% and once total payments have reached $15 million, the royalty will no longer be payable. MPR paid a royalty payment of $40 thousand per year during the preproduction period. Upon commencing production, payments under this agreement were deferred until March 31, 2021 with an annual interest rate of 4.5% applied to the outstanding balance. During the deferral period, MPR will pay an advance royalty payment of $100,000 per year until January 2021. As of June 30, 2020, $14,400 thousand remained for future royalty obligations. During the term of the agreement, MPR is required to comply with all mining, environmental and other applicable laws in order to maintain its right and title to the Los Gatos concession.
Agreement for Paula Adorada
The Paula Adorada concession was acquired from Chihuahua-based company Grupo Factor through an option to purchase agreement in effect from 2008 to 2013. Once all obligations and payments were completed during the term of the agreement, the registered ownership of the Paula Adorada concession (title 223392) was transferred from Grupo Factor to MPR in 2014, with no remaining obligations or royalties.
Unanimous Omnibus Partner Agreement
The Los Gatos District is owned and operated through the Unanimous Omnibus Partner Agreement. Pursuant to this agreement, the LGJV cannot make any "Major Decisions" without first having obtained Dowa's consent or without first having obtained the consent of holders of at least 90% of the interest in the LGJV, depending on the time such Major Decisions are made. Major Decisions, as defined in the agreement, include the significant operating decisions of the LGJV, such as, among other decisions, budgeting, development and exploitation approvals, loan and outside financing approvals, expansion of area of interest, surrendering claims, the creation of security interests on property, any initial public offering of the joint venture, and litigation settlements. Therefore, despite holding a majority equity interest in the LGJV, we do not exercise control over the LGJV.
We intend to exercise our right to repurchase an 18.5% interest in the LGJV from Dowa, increasing our ownership to approximately 70.0%. Following this increase in our ownership interest in the LGJV, we will continue to 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 (such as certain approvals, the creation of security interests on property, any initial public offering of the joint venture, and litigation settlements).
Option Agreement
On May 30, 2019 and in connection with the memorandum of understanding dated April 16, 2019, we entered into an option agreement with MPR, OSJ and Dowa, pursuant to which Dowa granted us an option to repurchase the approximate 18.5% equity interest in the LGJV by June 30, 2021, and only after the Los Gatos Working Capital Facility is repaid, for a total consideration of approximately $51.1 million and all costs incurred by Dowa in connection with its ownership of such equity interest, including, but not limited to, legal and accounting fees, capital contributions and taxes.
Priority Distribution Agreement
On May 30, 2019 and in connection with the memorandum of understanding dated April 16, 2019, we entered into a priority distribution agreement with MPR, OSJ and Dowa, pursuant to which we directed the LGJV to contribute dividend payments to an escrow account until an aggregate amount equal to $20 million has been deposited into the account, which is payable to Dowa as a priority dividend.
Sales Agreements
OSJ (the "Seller"), an entity that forms part of the LGJV, entered into a delivery contract, dated April 14, 2019, with Metagri S.A. de C.V. ("Metagri"), whereby Metagri agreed to buy and accept delivery of, and the Seller agreed to sell and deliver to Metagri, all lead concentrate that will be produced from the Cerro Los Gatos Mine until December 31, 2021. The lead concentrate will ultimately be delivered to Metagri's warehouse in Manzanillo, Mexico.
The Seller also entered into a delivery contract, dated July 15, 2019, with Ocean Partners, whereby Ocean Partners agreed to buy and accept delivery of, and Seller agreed to sell and deliver to Ocean Partners, all zinc concentrate that will be produced from the Cerro Los Gatos Mine until June 30, 2022. The zinc concentrate will ultimately be delivered to Dowa's zinc smelter in Akita, Japan, unless otherwise agreed to by Dowa. The Seller, from time to time, will enter into memoranda of agreement setting forth the terms and conditions for the sales of zinc concentrate.
From time to time, the Seller may enter into certain spot sale contracts should impurities in lead and zinc concentrate exceed certain specifications. Since the commencement of production, the Seller has entered into spot sale contracts due to high fluorine content for some production.
Climate and Topography
The Company’s present field camp is located in San José del Sitio, a community of approximately 200 persons, with electrical and water services, an elementary school and basic health services. Water resources in the region are mostly related to the Conchos River Basin, which includes the San Pedro, San Francisco de Borja and Satevó River Sub-Basins. Locally, there is significant groundwater deposits, with shallow groundwater recorded from most exploration drilling conducted by the Company. San José del Sitio is served by a 13.8-KV line, providing sufficient capacity for domestic needs but not enough for industrial needs. Larger-capacity electrical lines service the nearby city of Valle de Zaragoza, 45 kilometers to the southeast of the project area, where the 113-MW Santiago (Valle de Zaragoza) electrical sub-station is located.
The Los Gatos ProjectDistrict area is located in the Sierras y Llanuras del Norte Physiographic Province near the boundaries between the Gran Meseta, y Cationes andCañones, the Sierras yand Llanuras Tarahumara Sub Provinces. The general physiography of the Los Gatos areaDistrict is characterized by low to middle rolling volcanic hills with local escarpments and flat valley floors. Altitudes vary with between 1,550 masl at the base of the Santo Toribio Creek and 1,780 masl at the top of the Los Gatos Hill, one of the highest peaks of the Los Gatos ProjectDistrict area.
Vegetation is characterized by a semi-desert landscape, with typical low brush vegetation in the slopes, including lechuguilla, sotol, yucca, sage, bear grass and other types of indigenous grasses. Larger brush and trees are common along the main watercourses, with the presence of oak, cypress, poplar, huizache and mesquite, among others.
The climate in the area is typical of desert areas of northwest Mexico, extreme semi-acid.semi-arid. Exploration and mining activities at the Los Gatos ProjectDistrict are seldom interrupted by adverse weather conditions, with the exception of short-lived storms producing floods and damage to access roads.
There are a limited number
Aerial View of qualified workers on site, however, technical workers (miners, electricians, mechanics, computer technicians, etc.) can be found in the area and at Parral, 88 kilometers southeast, including heavy equipment and specialized operators. Primary and secondary-level technical schools are available in Valle de Zaragoza, and all levels of schooling are available in Parral and/or Chihuahua, each 2.5 hours away.Cerro Los Gatos Mine
Geological Setting
The Los Gatos ProjectDistrict is located in the transition zone between the Sierra Madre Occidental volcanic province of western Mexico and the Mesozoic Chihuahua basin to the east. It is also located in the general union ofcontact zone between the Sierra Madre Occidental, Chihuahua and Parral tectonostratigraphic terranes.
The area is largely characterized by a thick sequence of Tertiary volcanic rocks that are generally dissected by a strong north-northwest bearing fault system that divides the area into the plateau and barranca sections and are
subdivided in two major units, the Lower Volcanic Group and Upper Volcanic Group. The area is one of the largest known epithermal, precious-metal metallogenic provinces and is host to several well knownwell-known gold-silver producing mining districts in Mexico, such as Concheño, Batopilas, San Dimas-Tayoltita and Ocampo.
The dominant rocks of the Los Gatos ProjectDistrict area are thick accumulations of intermediate tuffs and lavas, with lesser felsic rocks, and Upper Cretaceous (Cenomanian) to Lower Paleocene aged sandstones, shales and limestones correlative with the Mezcalera formation, locally metamorphosed to phyllites, quartzites and marbles near areas of igneous activity. Rocks of this oldest sedimentary sequence occur within a small horst block located to the northwest of the Cerro Los Gatos system,District, with prominent high-angle fault boundaries on the north and south, parallel to the regional trend of faulting. Intruding and deposited on the entire section are locally important rhyolite flows, flow domes and dikes, usually strongly silicified, that have all of the varied textures expected with the development of flow domes, including autobreccias,breccias, flow banding and intrusive/extrusive transitions. Each of the rocks in the section contains observable hydrothermal alteration that suggests that mineralization in the area probably occurred late in the history of the development of the volcanic section. It is important to stress, however, that economic grades of mineralization have only thus far been identified in the andesite and dacite sections.
History of the Los Gatos ProjectDistrict
The Los Gatos ProjectDistrict has been the subject of very limited historical prospecting and mineral exploration, including the development of shallow workings and preliminary exploration activities by Consejo de Recursos Minerales (now SGM)the Servicio Geológico Mexicano, the Mexican Geologic Survey) at the Esther, Gavilana (Paula) and San Luis zones with references to the occurrence of silver, lead and zinc. As a result, the Los Gatos Project will require significant timeThe construction and capital before the Project may be brought into production. The Company’s surfacedevelopment work has not uncovered any evidence of past modern prospecting activities in the area. The Los Gatos ProjectDistrict was initially recognized by reconnaissance activities by La Cuesta International Inc. in 2005 and later offered to Los Gatos Ltd. (parent(original parent of MPR). An initial letter of agreement for exploration work on the Los Gatos ProjectDistrict was negotiated and a final contract ratified in April 2006 between MPR and La Cuesta International S. A. de C.V. (Mexican(the Mexican subsidiary of La Cuesta International Inc.). Only minor field work was conducted during 2006-2007in 2006 and 2007 on the Los Gatos ProjectDistrict during the waiting period for the initial concession to be titled, and formal exploration activities and drilling were conducted by MPR from and after 2008.
Exploration
The Los Gatos Project is without known reserves and is exploratory in nature. The Los Gatos ProjectDistrict consists of three identified silver discoveries, discoveries—the Cerro Los Gatos Mine, the Esther deposit and the Amapola zones, deposit—and 1011 other identified prospectsmineralized zones with over 100150 kilometers of outcropping quartz and calcite veins.veins are also located in the Los Gatos District.
In 2008,2007, MPR initiated its first phase of exploration in the Los Gatos ProjectDistrict area with a program of surface geological mapping and rock sampling covering approximately 60% of the original Los Gatos concession within the core of the claim block. This work, conducted through a local Mexico-based consulting group, Grupo Azta, identified in excess of 100 kilometers of strike length of quartz and calcite veins, many of which contained lead, zinc and silver mineralization. Of the 1,217 rock samples taken from surface outcrops of vein and wall rocks, 200 samples contained values in excess of 10 grams of silver per tonne.
From June 2008 to October 2008, environmental permits were obtained, proposed drill areas were re-mapped and re-sampled, surface access rights were negotiated with local ranches, and drill access roads were constructed. In January 2009 and September 2009, reports and corresponding notices of activity were submitted to the Environmental Attorney Protection AgencySecretary of Environment and Natural Resources to cover the development of access roads and drill sites to drill 50 holes, along with a request to increase the number of drill holes to 250. Based on a report filed on December 5, 2011, the number of drill holes permitted on the Los Gatos ProjectDistrict was extended to 600 drill holes.
Environmental baseline data collection began in May 2010 for the development of future environmental studies required for the project. Data on flora, fauna, water, air, climate, security and social impacts are generally collected on a routine basis for integration into future environmental studies required for the Los Gatos Project.
Detailed soil geochemistry programs have been conducted over the Esther zonedeposit and the area between the Cerro Los Gatos Mine and Esther zones.deposit. Results of the sampling identified new veins in the Esther zonedeposit and revealed four separate structures between the Esther deposit and the Cerro Los Gatos zones.Mine.
Detailed topographic mapping has been created using Photosat, a Canadian contractor. The topography mapping was created at one meter, five meter, 10 meter and 50 meter contours from Geoeye®Geoeye® satellite coverage captured exclusively for the survey. Survey control points were established on the surface, with coordinates by total station in order to guarantee the accuracy of the survey.
A detailed 3D Induced Polarization survey was conducted during July 2010 using SJ Geophysics, a contractor from Canada. Lines were initially spaced at 100 meters with stations every 25 meters, and later tightened to 50 meters by 25 meters. Results of the survey suggest a correlation between vein
mineralization at the Cerro Los Gatos zoneMine and zones of high chargeability and low resistivity. In addition, the vein mineralization at the Esther zone suggestsdeposit suggested a similar relationship of high chargeability and low resistivity. The first holes to test the trends of mineralization from these surveys have successfully extended mineralization in both zones. As a result of the good correlation with mineralization, extensions of the surveys began in November 2010 inat both the Cerro Los Gatos Mine and Esther zones.deposit. Additionally, data is beingwas collected in the Amapola and San Agustin zones to determine the signature of mineralization in these new areas for drilling.
Drilling
As of August 2012, 345July 1, 2020, 739 exploration drill holes hadhave been completed by MPR for a total of 161,092in the Los Gatos District, totaling 259,060 meters.
Drill sites are selected based on surface vein outcrops and geometric projections into the subsurface, as well as geochemical, geophysical and geological targets. Drilling is conducted using a wire line rig with diamond core capabilities. Holes begin with HQ size and are reduced, if necessary, to NQ and very rarely BQ, if difficult drilling conditions are encountered. Holes are surveyed with a Flexit EZ trac device at 50 meter intervals as the holes are completed. Surveys of drill hole surfacehole-collar coordinates locations are completed by a local contract topographer using a Topcon Total Station GTS-236W. All information pertinent to the drilling is stored in a master database in Microsoft Access®Access®. TetraTech has reviewed the drilling information to be used for modeling and found the database to be reasonably free of errors and appropriate for use in this report. Additional drilling at the Cerro Los Gatos zoneMine is aimed at upgrading the confidence of the resource and identifying mineralized extensions along strike and down dip.
In addition to the drilling conducted at the Cerro Los Gatos Mine, the Esther deposit and the Amapola zones,deposit, MPR has conducted limited exploration drilling programs in ten other areas in the Los Gatos District which include Cieneguita, San Luis, Paula Adorada, San Agustin, Mezcalera, Torunos, Rodeo, Boca de Leon, EvaCieneguita, El Lince, El Rodeo, La Paula, Los Torunos Mezcalera, Ocelote, San Agustin, San Luis and El Lince.Wall-E/Ava. While anomalous levels of mineralization have been identified in each of these ten zones other than Wall-E/Ava, drilling data is too limited to speculate as to the presence of economic quantities of mineralization. Additional drilling will be required in each area to delineate the mineralization identified.
The Company’s objectives at the Los Gatos Project through 2013 are to:
expand the exploration drilling program;
conduct social, environmental and technical work on the property with the objective of completing a pre-feasibility study on the Cerro Los Gatos, Esther and Amapola zones;
perform additional in-fill drilling to further define mineralization at the Cerro Los Gatos, Esther and Amapola zones; and
continue to expand its interest in prospective mineral and surface rights.
Los Gatos ProjectDistrict Mineralogy
The Los Gatos ProjectDistrict hosts a series of quartz, quartz-calcite and calcite veins in at least eightfifteen separate vein systems that are exposed along a strike length of approximately 1230 kilometers and an outcrop belt width of
approximately five kilometers. Vein width is generally in the order of one meter, but local wide zones up to eight meters in outcrop and true vein widths in excess of 30 meters have been identified by diamond drilling. Structurally, the veins form two sets, with north and northwest strikes and mostly steep dips. West/northwest trending fault and fracture zones probably reflect reactivated basement structures, whereas many of the north/northwest trending faults probably are associated with basin-and-range extension. Epithermal mineralization is associated with both phases of extension, so both trends have exploration potential; however, the basement architecture has overall control on the distribution of magmatic centers and hydrothermal systems.
Mineralization at the Los Gatos ProjectDistrict is characterized by silver, lead, zinc and copper sulphides and their oxides, along with fluorite, manganese, barite and traces of gold associated with quartz and calcite veins. The veins vary in orientation from west-northwest to northwest to north-northwest to north-northeast and vary in thickness from one meter to eight meters outcrop, but with much greater true width at depth based upon diamond drilling. Study of the veins in hand specimen and thin section suggests that they are epithermal in origin and are likely of intermediate sulfidation composition, showing vein textures and gangue mineralogy that indicate a relatively high-level hydrothermal system in the boiling environment. Breccia with clasts of vein quartz indicates a protracted hydrothermal system during multiple faulting events, a positive sign for economic epithermal veins. It has been
interpreted that mineralizedmineralized-ore shoots may extend relatively far down dip, possibly to at least 230250 meters.
The Cerro Los Gatos is the most persistentMine vein system is persistent, with a general northwest trend dipping to the east, a mapped extension in the order of ten kilometers, and true widths of as much as eight30 meters and local associated veining up to 50 meters wide. Banded quartz veins and breccias are cemented by quartz, calcite and abundant manganese oxides (in surface outcrops).oxides. A study based on geological characteristics and silver-lead-zinc (arsenic-antimony-mercury) anomalous sections of the vein resulted in the discovery of the Los Gatos sub-horizontallistric-shaped mineralized horizon hosting the steeply to shallowly dipping mineralized-shoots at depth. Mineralization of interest is seen for approximately 2,500 meters in length and for an estimated average vertical extension in the order of 200 meters. High grade epithermal mineralization begins at a depth of around 100-150 meters. The reported average drilled true width of the structure is in the order of 8.9 meters. It has been interpreted that the top of the mineralized horizon at Los Gatos is generally located at an elevation of 1,3001,400 meters above sea level (masl) to 1,350 masl..
Original exploration activities at the Esther vein system indicated the presence of a narrow quartz vein, less than one meter, with minor veining and silicification and noticeable lack of calcite. However, the presence of a small high-grade mineralized-shoot, probably 60 meters deep, attracted interest in the area. Drilling of this area also resulted in the discovery of the Esther mineralized-shoot, which has a known length of 800 meters for the main mineralized-shoot, as well as up to 1,200 meters of additional mineralized vein. The height of the mineralized interval is indicated by two drill holes to be in the order of 100 meters; most mineral intersections range in the order of two meters to eight meters, with a probable average slightly over three meters. It has been interpreted that the top of the favorable horizon at Esther is generally located about 120 meters below the surface.
The Amapola zone is characterized by a seriesdeposit contains several vein systems at varying degrees of parallelstrike and dip that are the target of exploration. Currently, four of these veins comprise adequate Ag grade and thickness to be considered as mineralized material and geologically modeled. The four veins striking north to southinclude the Albita, Elizabeth, Cascajal and west-northwest to east-southeast with sub-vertical dip.Julia. The Amapola zone is located on the regional west-northwest trend of the Cerro Los Gatos Zone 4.5 km to the northwest, however the highest grade mineralization does not share the same strike orientation. Six mineralized veins have been identified in the Amapola zone from drilling, however most knownmineral resources are located inprincipally present on the Albita and Elizabeth veins, which are parallel and separated only bytogether comprise a few meters."corridor" of mineralization up to approximately 50 meters thick.
Sampling, Analysis and AnalysisData Verification
MPR has carried out sampling campaigns that have included surface, limited underground and core samples. Samples were taken by local crews under the supervision of either a geologist of MPR or one of their contractors. Sampling intervals were, in most cases, two meters, with local variations depending on vein geology, to a
minimum of 0.8 meters where structures were found. Detailed sampling was carried out at intervals directed by geological criteria, with priority given to testing high-grade zones in the vein structures and attention also given to identifying possible mineralization in the wall rock and quartz stockwork veining.
MPR established a sampling protocol, which was followed through the drilling campaign, that in summary includes: supervision by MPR personnel, with the verification of core handling, recovery, core accommodation and depth recording by the contractor; and core collection, measurement, core recovery, photographing, specific gravity, geotechnical information and sampling interval selection by MPR geologists.
Detailed logging of the sample intervals is conducted once the core samples are sawed, with detailed descriptions and estimations of mineralogy and mineral content, hydrothermal alteration, veining and fracturing. Assay intervals are divided in two equal parts by diamond saw, with most sampling conducted on two meter intervals, except for specific vein intervals. Vein intervals are selected for more detailed sampling, with a minimum of 0.8 meters per interval in the sample and a maximum of two meters.
Samples are collected in standard plastic sample bags and tagged with a unique sample number recorded for each interval. Samples are grouped by drill hole and transported by pickup truck to the ALS Chemex laboratories sample receiving location in Chihuahua City, Mexico. From the time the core samples leave the drill site to the time the samples are delivered to ALS Chemex, they are escorted and under the supervision of personnel from MPR.
Samples are dried, crushed and pulverized by ALS Chemex in Chihuahua City. Assay orders are delivered to the lab, and a copy of the receipt obtained is filed and registered in MPR’sMPR's database. Sample pulps are then shipped by ALS Chemex to their laboratory in Vancouver, Canada for ICP analyses of silver, base metals and trace elements using a four-acid digestion technique. Gold assays are also completed using fire assay-AA preparation on 30-gram splits of the sample material.
ALS Chemex has developed and implemented at each of its locations a Quality Management System (QMS) designed to ensure the production of consistently reliable data. As a result, the lab has received, including its sample preparation section in Guadalajara, the ISO 9001:2000 QMS registration from QMI. The ALS Laboratory Vancouver branch has also been accredited as conforming to requirements of Canadian regulations in this matter.
MPR has set up a Quality Assurance/Quality Control (QA/QC) program to monitor the drilling program at the Los Gatos Project,District, including the use of: (1) blanks (barren silica sand or barren andesitic flow material inserted wherever the geologist deems appropriate, but no less than one for every 40 samples focused on areas of higher metal values, which could lead to contamination); (2) standards are added every 20th20th sample (MPR has purchased 12 different standards from Rocklabs Ltd.); and (3) duplicates are also analyzed every 50 samples (each batch) by placing two sample tickets in the same sample bag and having the lab generate two pulps of the same sample for analysis.
It is believed that core sampling is representative of mineralized intersections, with minor variations due to irregularities in mineralization, and that the QA/QC programs established by MPR and the sampling process follow industry standards and are adequate forsupport the estimation of mineral resource estimates.resource.
A review was made of available information derived from previous exploration work. This information included geological and sampling reports, drill logs, as well as assay results. Verification consisted of a general review of geological characteristics of the main mineralized areas, shown by the MPR field checking of geological maps in all areas and of sampling procedures by MPR as well as a review of all vein intersections and discussions of detailed sample handling, sampling and security procedures established by MPR. The original locations of samples reviewed were located, although most require re-painting. Tetra Tech verified several drill hole location monuments with a handheld global positioning system.
Tetra Tech has conducted sample verification to evaluate whether the samples selected by MPR for metallurgical and hardness testing were geologically representative of the material in the mine plan. The review found that: samples were well selected with respect to various grades, alterations and host rock; there was no apparent metal domaining or zoning in the deposit; and that most of the samples fromfall within the bulk of the grade distributions and sampling of the higher-grade material has been accounted.
Mineral Resource Estimates—Cerro Los Gatos Mine, Esther and Amapola areas. 36 samples from Cerro Los Gatos and 16 samples from Amapola were chosen. Care was taken to select a fair distribution of samples based on the deposit. Core samples were split in MPR’s sample preparation facilities in San Jose del Sitio from the remaining core halves. Tetra Tech has concluded that based on the results of the verification, MPR’s sampling can be considered reliable.
Los Gatos Mineralized Material EstimateDeposits
All blocks in this estimate have been delineated by appropriately spaced drilling. Grade and tonnage has been estimated within a digital three-dimensional block model using the KirgingKriging method. Mineralized material hasMineral resources have been estimated for three individual deposit areas: the Cerro Los Gatos Mine, Esther and Amapola.Amapola deposits. The mineral resource estimates contained in the Los Gatos Technical Report have an effective date of September 6, 2019. The mineral resource estimates contained in the
Los Gatos Technical Report are presented on an undiluted basis without adjustment for metallurgical recovery.
For the Cerro Los Gatos Mine, a cut-off grade of 150 grams silver equivalent/tonne was estimated using generalized parameters, including the following: $40/tonne for mining costs; $20/tonne for processing costs; $4/tonne for general and administrative costs; 83% recovery at an assumed price of $18.00/oz silver; 92% recovery at an assumed price of $0.92/lb lead; and 77% recovery at an assumed price of $1.01/lb zinc. For the Esther deposit, a cut-off grade of 100 grams silver equivalent/tonne was estimated using generalized parameters, including the following: $40/tonne for mining costs; $20/tonne for processing costs; $3/tonne for general and administrative costs; 100% recovery at an assumed price of $22.30/oz silver; 95% recovery at an assumed price of $0.97/lb lead; and 88% recovery at an assumed price of $0.91/lb zinc. For the Amapola deposit, a cut-off grade of 100 grams silver equivalent/tonne was estimated using generalized parameters, including the following: $40/tonne for mining costs; $20/tonne for processing costs; $3/tonne for general and administrative costs; 100% recovery at an assumed price of $22.30/oz silver; 95% recovery at an assumed price of $0.97/lb lead; and 88% recovery at an assumed price of $0.91/lb zinc.
Projected revenues from the sale of silver, zinc and lead are based upon long-term consensus prices that were the averages of long-term forecast prices that MPR obtained from various financial institutions as of the effective date of the respective mineral resource estimates. As of the effective date of the respective mineral resource estimates, the long-term consensus prices reflected the best estimate of the sales price that may be realized in the future from the mineral resources. Gold and copper, being part of the epithermal system, are included in the Mineral Resource estimate as comparisons, however they have not been considered for purposes of determining the Ag/Eq cut-off grade since copper in the final concentrates sold would not receive any payment and gold revenue is estimated at only 2.78% of the payable metal.
The Tonnetonne and grade estimates in the block model are based on drill hole assay sample intervals. The vein widths are constrained by three-tensionalthree-dimensional solids and have not been diluted.
To be classified as mineralized material, a block Sample intervals were composited to two meters, which is the mode sample length. Compositing was requiredinitiated and terminated at the top and bottom of continuous selected vein samples, resulting composites were permitted to be estimated using data points inside a search ellipsoid ranging from 125one to 130 meters. The search ellipsoid long axistwo meters in length and intervals less than one meter were rejected. As part of the Kriging process, composite influence was additionally weighted by interval length to provide further normalization. Compositing greater than two meters was determined using variogram analysis. In addition to the search ellipsoid range, samples were requirednot to be sourced fromappropriate because three-meter composites would cause samples to be split and four-meter composites are too large to represent the vein across drip in some areas. At the Amapola deposit, ordinary Kriging was used. A single Kriging pass was made on each of the four veins and their secondary nearest neighbor. An inferred pass was only made for the Albita and Elizabeth veins. Similarly, at least two drill holes per estimatethe Esther deposit, grade estimation was completed using ordinary Kriging. An initial Kriging pass was made on each of the three veins and havefollowed by a relative Kriging error of less than 1.04 for Amapola, 1.25 for Esther and 1.45 for Cerro Los Gatos.secondary nearest inferred pass.
Density of each block was determined from measured density samples within the mineralized zones and Kriged as a block attribute.
The table below summarizes the mineral resource estimates at the Cerro Los Gatos Mine and the Esther and Amapola deposits as of the effective date of the Los Gatos Technical Report.
Los Gatos District Mineral Resource Estimates Inclusive of Mineral Reserves as of the Effective Date of the Los Gatos Technical Report
| | 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 | |||||||||||||||||
The table below summarizes the mineral resource estimates exclusive of reserves at the Cerro Los Gatos Mine as of the effective date of the Los Gatos Technical Report.
Cerro Los Gatos Mine Mineral Resource Estimates Exclusive of Mineral Reserves as of the Effective Date of the Los Gatos Technical Report
| | 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 | |||||||||||||||||||||||||||
Resources based on a cut-off grade of 150 grams silver equivalent/tonne at assumed metal prices of $18.00/toz silver, $0.92/lb lead and $1.01/lb zinc; gold was not considered in silver equivalent calculation. The mineral resource estimates contained in the Los Gatos Technical Report have an effective date of September��6, 2019. The mineral resource estimates contained in the Los Gatos Technical Report are presented on an undiluted basis without adjustment for metallurgical recovery. Reserves based on a $75 NSR cut-off value. NSR is defined as revenue per tonne mined less the sum of concentrate refining, treatment and transportation costs per tonne mined. The mineral reserve estimates for the Cerro Los Gatos Mine reflect diluted grades with adjustment for metallurgical recovery. The mineral reserve estimates contained in the Los Gatos Technical Report have an effective date of July 1, 2020 and exclude 655,746 tonnes of material that has been mined through June 30, 2020. Mineral reserve estimates and mineral resource estimates contained in the Los Gatos Technical Report have different effective dates and are based on different dilution and recovery factors and cut-off grades.
The material assumptions for the mineral resource estimates at the Cerro Los Gatos Mine include (i) resource estimation completed by Tetra Tech in MicroMine mining software using drill hole data provided by MPR, (ii) usage of histograms and probability plots to determine where high-grade distribution tails became unsupported or deviated from lognormal and application of upper limits for grade capping, (iii) compositing sample intervals to two meters to match the mode sample length, (iv) using geological modeling and vein modeling, (v) using specific gravity measurements and (vi) no dilution being accounted for in the mineral resource estimates. See Section 14.1 of the Los Gatos Technical Report. The material assumptions for the mineral resource estimates at the Amapola deposit include (i) resource estimation completed by Tetra Tech in MicroMine software technology using drill hole data provided by MPR, (ii) using ordinary Kriging, with a single Kriging pass being made on the four veins of the Amapola deposit and a secondary nearest neighbor inferred pass made only for two of the veins and (iii) using specific gravity measurements to estimate vein density. See Section 14.2 of the Los Gatos Technical Report. The material assumptions for the mineral resource estimates at the Esther deposit include (i) resource estimation completed by Tetra Tech in MicroMine software technology using drill hole data provided by MPR, (ii) using ordinary Kriging, with a single Kriging pass made on each of the three veins of the Esther deposit followed by a secondary nearest neighbor inferred pass and (iii) using specific gravity measurements to estimate vein density. See Section 14.3 of the Los Gatos Technical Report.
We are unaware of any title, taxations, socio-economic, marketing, political or other relevant factors that could materially affect this mineral resources estimate.
Mineral Reserve Estimates—Cerro Los Gatos Mine
The mineral reserve estimates include the portion of the measured and indicated resource that can be mined economically. Economic criteria and mining constraints (based on the selected mining methods) are applied to the resource blocks to define mineable blocks. Mineral reserves are determined after applying dilution and recovery factors to these mineable blocks.
Mineral reserve estimates are calculated from the mine plan created from the September 2019 resource update. The mineral reserve estimates contained in the Los Gatos Technical Report have an effective date of July 1, 2020 and exclude 655,746 tonnes of material that has been mined through June 30, 2020. The table below shows the reconciliation of mined tonnage and grades to the modeled reserve depletion for this time period, with differences resulting primarily from different sequencing of stopes and variances in ore tonnes:
| | Tonnes | Au (g/t) | Ag (g/t) | Pb (%) | Zn (%) | NSR ($) | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Production Statistics | 655,746 | 0.45 | 253 | 2.62 | 3.67 | 161 | |||||||||||||
Modelled Reserve Depletion | 715,818 | 0.51 | 282 | 2.62 | 3.79 | 170 | |||||||||||||
A cut-off grade of $75/tonne NSR value was used to calculate reserves. Projected revenues from the sale of silver, gold, zinc and lead are based upon long-term consensus prices of $18.99/oz silver, $1,472/oz gold, $0.87/lb lead and $1.09/lb zinc. These prices were the averages of long-term forecast prices that MPR obtained from nine financial institutions. As of the effective date of the mineral reserve estimates, the long-term consensus prices reflected the best estimate of the sales price that may be realized in the future from the mineral reserves. See Section 21 of the Los Gatos Technical Report.
We are unaware of any title, taxation, socio-economic, marketing, political or other relevant factors that could materially affect this mineral reserve estimate.
The table below summarizes the mineral reserve estimate at the Cerro Los Gatos Mine, with an effective date of July 1, 2020, which includes dilution and recovery factors.
Cerro Los Gatos Mineral Reserve Estimates as of the Effective Date of the Los Gatos Technical Report
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 | |||||||||||||||
Reserves based on a $75 NSR cut-off value. NSR is defined as revenue per tonne mined less the sum of concentrate refining, treatment and transportation costs per tonne mined. The mineral reserve estimates for the Cerro Los Gatos Mine reflect diluted grades with adjustment for metallurgical recovery. The mineral reserve estimates contained in the Los Gatos Technical Report have an effective date of July 1, 2020 and exclude 655,746 tonnes of material that has been mined through June 30, 2020. Mineral reserve estimates and mineral resource estimates contained in the Los Gatos Technical Report have different effective dates and are based on different dilution and recovery factors and cut-off grades.
Proven reserves exceed measured resources as a result of the different dilution and recovery factors and cut-off grades being used for mineral reserve estimates compared to mineral resource estimates. Mineral reserve estimates have an effective date of July 1, 2020, account for dilution and recovery factors and are based on a cut-off grade of $75/tonne NSR. In contrast, mineral resource estimates for the Cerro Los Gatos Mine have an effective date of September 6, 2019, are presented on an undiluted basis without adjustment for metallurgical recovery and are based on a cut-off grade of 150 grams silver equivalent/tonne.
The material assumptions for the mineral reserve estimates at the Cerro Los Gatos Mine include (i) assigning NSR values to the block model, (ii) using a dilution strategy developed by a geomechanical consultant, (iii) application of mining recovery factors, including stope recovery and drift-and-fill recovery and (iv) application of dilution and recovery factors to stope tonnage and using Deswik scheduling software to develop a LOM development and production schedule. See Section 15 of the Los Gatos Technical Report.
Mineral Processing and Metallurgical Testing
The Cerro Los Gatos Mine is a silver-lead-zinc deposit with relatively complex mineralogy. Upon review of the metallurgical testing data, it was clear that the Cerro Los Gatos Mine mineralization responded well to a conventional sequential silver-lead-zinc flotation processing. Zinc rougher flotation tailings and zinc first cleaner scavenger tailings are combined to become the final tailings. Tailings thickener underflow (100%) is pumped to a cyanide destruction facility. Currently, all tailings are disposed of in the tailings storage facility. Once the backfill plant is in operation, and after detox, 40% of final tailings will be pumped to the backfill plant and the remaining 60% will be pumped to the tailings storage facility. Operational results have indicated that additional removal of fluorine will be required. Additional floatation cells have been added to the lead and zinc circuits, with a goal of reducing the fluorine in the final concentrates.
The expected grades and recoveries for lead, zinc, and silver to individual flotation concentrates were further investigated by a pilot plant program at SGS Lakefield using a sample composed of a bulk sample accessed by an underground decline into the orebody. The results of that program are being
finalized but preliminary indications generally support the study grade and recovery estimates provided herein.
Positive lead and silver flotation results were achieved from the SGS Vancouver Metallurgical Lab. The final lead cleaner concentrates of the locked cycle tests averaged 60.9% lead at 5,404 g/t silver at average recoveries of 89% lead and 68.7% silver. The zinc cleaner concentrates averaged 54.2% at an average recovery of 66.0% due to the high willemite content.
Mining Operations
Cerro Los Gatos Mine Underground Development
The underground mine design supports a steady-state production rate of 2,500 tpd of ore. Over the life of the mine, the mine is projected to produce 81 million ounces of silver, 69 thousand ounces of gold, 878 million pounds of zinc, and 499 million pounds of lead in concentrate. The sequence of mining began with the Central Zone, which had already been accessed via the existing decline developed down to the 1400 Level. The bulk of the Central Zone will be mined using the drift-and-fill method, as the dips, widths and thicknesses of the vein structures are amenable to this mining method.
The Northwest Zone is being mined concurrently with the Central Zone via longhole stoping methods with sublevels developed at 20 meter vertical intervals. Portions of the Northwest Zone that are thicker than nine meters (footwall to hanging wall) will be mined using transverse longhole mining. Areas that are less than nine meters in width will be mined using longitudinal longhole mining. In the Central Zone, operations confirmed that backfill deficiencies caused unstable conditions on the hanging-wall zone, as it was experienced in stope 625, where the stability problems created blocks causing the support to yield. The predicted conditions in this zone have been accurate. In the Northwest Zone, the operating geotechnical conditions have been better than the anticipated conditions. This has allowed the excavation of bigger dimensions in the stope length (more than 12 meters), and the planned activities have considered excavating more in the vertical dimension of the stope (25 meters height). Some of the stability problems found in this zone are mainly due to drilling deficiencies, which have reached areas near the hanging-wall fault zone. The 3D modeling of the Southeast Zone did not identify any issues except for potential hanging wall failure.
Modern trackless mobile equipment is being employed for most mining activities. Load-Haul-Dump ("LHD") trucks and dedicated underground trucks are used for ore/waste loading and transport from the underground workings through an internal ramp system and portal that connects all levels to surface. Ongoing waste development to sustain the 2,500 tpd production rate averages approximately 211 meters/month during the production period.
Based on the deposit geometry and anticipated geomechanical conditions, underground mining of the Cerro Los Gatos Mine resource will incorporate both longhole and drift-and-fill mining methods. The existing exploration decline from surface will be extended to provide primary access and delivery of services. The ramp will also be used for haulage of ore and waste from the underground operations.
Processing and Recovery Operations
The processing facility is designed to treat 2,500 tpd of silver, lead and zinc material at an operational availability of 92%. The processing flow sheet for the project is a standard flow sheet commonly used in the mining industry, including conventional flotation recovery methods typical for lead-zinc material. The production plant has been constructed and adjustments will continue to optimize performance. Additional flotation cells have been installed to remove fluorine from the concentrates.
Run-of-mine ("ROM") material is crushed in a primary jaw crusher located near the underground mine portal. It is then conveyed to the processing facilities where it is ground to 80% finer than 45 microns in a semi-autogenous grinding and ball milling circuit. The ore is further processed in a flotation circuit, consisting of lead flotation followed by zinc flotation. The majority of the silver will be recovered in the lead flotation circuit and some silver will also be collected in the zinc flotation circuit. Lead sulfide is recovered in a rougher flotation bank, producing a concentrate that is then upgraded to smelter specifications in three stages of cleaning. Tails from the lead flotation section is then conditioned for zinc sulfide flotation. The process scheme for zinc flotation also includes a rougher bank and five stages of cleaning to produce smelter-grade zinc concentrates. For both lead and zinc sections, the rougher flotation concentrates are reground to 80% finer than 25 microns prior to cleaner flotation to liberate the sulfides for further upgrading. An additional deep-froth flotation cell has been added to the zinc circuit, and one additional deep-froth flotation cell will be added to the zinc and lead circuits during 2020, to remove more fluorine, a deleterious mineral for sales. Both final lead and zinc concentrates are thickened, filtered and stored in concentrate storage facilities prior to being loaded in trucks for shipment.
Infrastructure, Permitting and Compliance Activities
In addition to the recently constructed Cerro Los Gatos Mine processing plant and other facilities, we have a field camp located in nearby San José del Sitio, a community of approximately 264 persons, with electrical and water services, an elementary school and basic health services. Water resources in the region are mostly related to the Conchos River Basin, which includes the San Pedro, San Francisco de Borja and Satevó River Sub-Basins. Locally, there are significant amounts of water, with shallow groundwater recorded from most exploration drilling conducted by us.
Underground development of the Cerro Los Gatos Mine commenced in 2015 and surface infrastructure development commenced in 2017. All significant surface infrastructure was completed in mid-2019 and the Cerro Los Gatos Mine commenced production of lead and zinc concentrates on September 1, 2019. The Cerro Los Gatos Mine processing plant is currently designed for 2,500 tpd capacity and the grinding circuit was engineered for expansion to 3,000 tpd in the future.
The Cerro Los Gatos Mine is located in the Municipality of Satevó, Chihuahua, Mexico, approximately 160 kilometers southwest of the state capital of Chihuahua City and approximately 8 kilometers west of San José del Sitio, Chihuahua. The access road from Chihuahua, Mexico is newly paved. A portion of the road from San José del Sitio was rerouted to the mine site to minimize interference with the stream that runs near the mine property.
Construction of required infrastructure has been completed, including administration offices, mine dry, fuel storage, mine maintenance shop, jaw crushing station, dome-covered crushed ore stockpile, process plant (including grinding circuit, flotation circuit, concentrate and tailing thickeners, concentrate
loadout and tailings detoxification), tailing storage facility, electrical substation, 66 kilometers of power line connecting high voltage to the grid substation at San Francisco de Borja, assay lab, mill maintenance, dewatering wells and water cooling and distribution system, and residential camps and associated infrastructure.
The camps consist of structural steel pre-engineered buildings capable of housing over 350 people. The camps include kitchen and cafeteria, laundry, infirmary, and other buildings required to maintain this facility. Emergency power is provided for in the camp to deliver 100% backup in the event of a power outage.
The entire project is served by satellite-dish based internet and telephone communications.
Power to the site is supplied via a 115 kV utility transmission line. This originates from the San Francisco de Borja substation in Satevó (Chihuahua), where a 115 kV connection has recently been installed.
All raw water to meet potable and non-potable water demand is supplied by groundwater pumped from dewatering wells. The well water is cooled from 50°C to 40°C prior to use. Sewage water treatment systems were included to handle waste as required on the project.
Storage and management of landfill disposal is housed in a single building, separated into two zones—one for non-hazardous waste and a second zone for hazardous waste. The hazardous waste is to be collected and disposal by a certified and authorized company per Mexican regulations.
In 2008, we negotiated surface access rights with local ranch owners and obtained environmental permits for drilling. In April 2012, we entered into a mine and land access agreement with the local community, the Ejido La Esperanza (the "Ejido"), which provides annual land access with a renewal fee of $11,200. We also maintain an easement contract for 30 years with the Ejido for the access road to the mine.
On December 12, 2016, MPR submitted an environmental impact statement to the Mexican Secretary of Environment and Natural Resources, which regulates the environmental aspects of mining projects and issued the permits once such statement is approved. The statement was approved in 2017. We also received approval for the permits for land use, authorization and approval for initiation of construction of mining workings and infrastructure and official alignment and number from the Municipality of Satevó, Chihuahua in June and July of 2018. In May 2019, we received approval for Environmental Unique License for the production of 2,500 tpd.
On July 17, 2017, the Mexican Secretary of Environment and Natural Resources approved a mining exploitation project in Satevó, Chihuahua to develop work and activities (site preparation, construction, operation and others) needed to mine and explore the area. The authorized permit period is for 24 years ending July 17, 2041, with the possibility to extend for a similar period. Additionally, on September 4, 2017, we received the permitting to develop, construct and operate a project named Línea Eléctrica 115 KV Los Gatos, which consists of opening an 18-meter wide corridor over 58.0 kilometers. This project affects an area of 105 hectares to support the power lines in the municipalities of San Francisco de Borja and San Javier Satevó, Chihuahua. The authorized permit period is until September 4, 2037. We also received the relevant change of land use permitting to remove forest vegetation and fertile soil in an area of 390.6972 hectares to prepare the site and construct the infrastructure required for the mining exploitation of the Los Gatos project which expires November 1, 2020, with the option to extend.
We are committed to safety at the Cerro Los Gatos Mine. The Cerro Los Gatos mine is built to higher environmental standards than required by Mexican law, with a fully-lined tailings impoundment facility and enclosure of the conveyors and ore storage dome. We also use state-of-the-art rescue
capsules to hoist personnel to surface. Our cumulative injury frequency rate at the Cerro Los Gatos Mine has consistently been below the annual U.S. MSHA Lost Time Injury Frequency Rate.
Capital and Operating Costs
All costs and economic results are presented in U.S. dollars. Quantities and values are presented using standard metric units unless otherwise specified. No escalation has been applied to capital or operating costs. No gearing is assumed in the analysis. Capital and operating cost estimates have an accuracy level of ±15%, and, given that the mine is currently in production, capital and operating cost estimates have a contingency of 0%. See Section 21.3 and Section 21.4 of the Los Gatos Technical Report.
The economic analysis contained in the Los Gatos Technical Report is presented on an unlevered, post-tax, present value basis and has an effective date of July 1, 2020. For a discussion of the mineral resource estimates and mineral reserve estimates contained in the Los Gatos Technical Report, see "—The Los Gatos District—Mineral Resource Estimates—Cerro Los Gatos Mine, Esther and Amapola Deposits" and "—The Los Gatos District—Mineral Reserve Estimates—Cerro Los Gatos Mine." Technical economic tables and figures presented in this prospectus require subsequent calculations to derive subtotals, totals, and weighted averages. Such calculations inherently involve a degree of rounding, which are not considered to be material.
LOM sustaining capital cost requirements are estimated to be $267,000 thousand. Initial capital of $315,600 thousand was required to commence operations and construction was completed on time and on budget. Capital cost estimates used MPR-provided database information for mine and surface infrastructure, process plant and infrastructure, tailings storage facility, waste rock storage facility, water management, environmental, reclamation and owner's costs.
Description | Units | Sustaining Capital | |||||
|---|---|---|---|---|---|---|---|
Direct Costs | |||||||
Mine & Surface Infrastructure | $ | 000s | 266,398 | ||||
Direct Costs | $ | 000s | 266,398 | ||||
Indirect Costs | |||||||
Mine & Surface Infrastructure | $ | 000s | 932 | ||||
Indirect Costs | $ | 000s | 932 | ||||
| | | | | | | | |
Total Sustaining Capital | $ | 000s | 267,330 | ||||
| | | | | | | | |
LOM operating costs are based on current operations and are summarized in the table below. The mine operating cost estimate includes all sill development, stope production, and drift-and-fill production and associated indirect costs. Operating costs include all labor, material, mobile and fixed equipment operating, and power consumption costs.
Description | Unit Cost ($/meter) | Unit Cost ($/t-milled) | |||||
|---|---|---|---|---|---|---|---|
Mine, Surface and G&A | 26.47 | 83.58 | |||||
| | | | | | | | |
LOM Operating | — | 83.58 | |||||
| | | | | | | | |
Economic Analysis
The economic analysis contained in the Los Gatos Technical Report is presented on an unlevered, post-tax, present value basis and has an effective date of July 1, 2020. For a discussion of the mineral resource estimates and mineral reserve estimates contained in the Los Gatos Technical Report, see
"—The Los Gatos District—Mineral Resource Estimates—Cerro Los Gatos Mine, Esther and Amapola Deposits" and "—The Los Gatos District—Mineral Reserve Estimates—Cerro Los Gatos Mine." For a discussion of the assumed capital and operating costs in the Los Gatos Technical Report, see "—The Los Gatos District—Capital and Operating Costs."
The results of the economic analysis are summarized below:
Mine Life | years | 11 | ||||
Ore Tonnage | kt | 9,618 | ||||
| Life-of-Mine Payable Production | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Avg. Annual Payable Production (51.5% basis) | ||||||||||
| Average Grade Processed | (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 | ||||||||
Silver equivalent and by-product credits calculated using LOM average prices of $18.99/oz silver, $1,472/oz gold, $0.87/lb lead and $1.09/lb zinc. The economic analysis contained in the Los Gatos Technical Report has an effective date of July 1, 2020 and excludes 655,746 tonnes of material that has been mined through June 30, 2020.
Cerro Los Gatos Mine Unlevered Free Cash Flow Profile on a 100% Basis (in millions)
Cerro Los Gatos Mine Unlevered Free Cash Flow Profile on a 51.5% Basis (in millions)
Cerro Los Gatos Mine LOM Revenue by Commodity(1)
See Section 22 of the Los Gatos Technical Report. The economic analysis contained in the Los Gatos Technical Report has an effective date of July 1, 2020 and excludes 655,746 tonnes of material that has been mined through June 30, 2020.
The graphs below show the sensitivity analysis of the project economics and LOM revenue by commodity contained in the Los Gatos Technical Report at silver prices of $15.00/oz, $20.00/oz, $25.00/oz and $30.00/oz. The economic analysis contained in the Los Gatos Technical Report used long-term consensus silver price of $18.99/oz.
Cerro Los Gatos Mine Net Present Value (Post Tax; 5.0%) Sensitivity Analysis on a 100% basis
Cerro Los Gatos Mine LOM Revenue by Commodity Sensitivity Analysis
See Section 22 of the Los Gatos Technical Report. The economic analysis contained in the Los Gatos Technical Report has an effective date of July 1, 2020 and excludes 655,746 tonnes of material that has been mined through June 30, 2020.
Exploration, Development, and Production
Concentrate production is currently achieving quality specifications and expected grades. The Cerro Los Gatos Mine is expected to produce, on average, 12.2 million payable silver equivalent ounces annually through the existing mine life (or 6.3 million payable silver equivalent ounces annually on a 51.5% basis), with an attractive, low-cost AISC profile. In addition to the goal of achieving the plant's 2,500 tpd design capacity, we intend to use a portion of the proceeds from this offering to complete a feasibility study, prepared in accordance with the SEC Mining Modernization Rules and NI 43-101, to expand the Cerro Los Gatos Mine production rate to 3,000 tpd. If feasible, we expect the LGJV to complete the expansion within the next three to four years.
The below graphs show our estimated payable silver equivalent production levels at the Cerro Los Gatos Mine in the coming years:
2020—2031 Cerro Los Gatos Mine Payable AgEq Production Estimate (Moz) and AISC ($/oz AgEq) on a 100% Basis
2020—2031 Cerro Los Gatos Mine Payable AgEq Production Estimate (Moz) and AISC ($/oz AgEq) on a 51.5% Basis
Payable silver equivalent calculated using feasibility study LOM average prices of $18.99/oz silver, $1,472/oz gold, $0.87/lb lead and $1.09/lb zinc. AISC calculated as sum of total operating costs, treatment and refining charges, penalties, transportation and freight, royalties and capital costs for each year. See Section 22 of the Los Gatos Technical Report. The Los Gatos Technical Report has an effective date of July 1, 2020. The mineral resource estimates contained in the Los Gatos Technical Report have an effective date of September 6, 2019. The mineral reserve estimates and the economic analysis contained in the Los Gatos Technical Report have an effective date of July 1, 2020 and exclude 655,746 tonnes of material that has been mined through June 30, 2020. For a discussion of the mineral resource estimates and mineral reserve estimates contained in the Los Gatos Technical Report, see "—The Los Gatos District—Mineral Resource Estimates—Cerro Los Gatos Mine, Esther and Amapola Deposits" and "—The Los Gatos District—Mineral Reserve Estimates—Cerro Los Gatos Mine." For a discussion of the assumed capital and operating costs in the Los Gatos Technical Report, see "—The Los Gatos District—Capital and Operating Costs." Based on production to date, we believe that the Cerro Los Gatos Mine has the potential to produce up to 7.2 million ounces of silver equivalent on a 100% basis (3.7 million ounces of silver equivalent on a 51.5% basis) in fiscal year 2020.
We believe there is widespread mineralization potential beyond the Cerro Los Gatos Mine, the Esther and Amapola deposits and the 11 other mineralized materialzones, as more than 85% of the land position has yet to be drilled.
Location of the Cerro Los Gatos District
The current resources are significant, but we believe that additional resource potential remains in the immediate area. Drill testing of other high-priority targets within the Los Gatos District has been relatively limited given our focus on delineation of reserves at, and construction of, the Cerro Los Gatos Mine. As a result, the highly prospective Los Gatos District remains underexplored. Drilling at the Esther deposit to date has demonstrated good grade continuity along the system and characteristics similar to that identified during preliminary work at the Cerro Los Gatos Mine. Following potentially positive results from infill drilling at the Esther and Amapola deposits, we expect to update the resources and perform a scoping study to determine if these two deposit areas could generate economic production, representing further upside potential for the broader Los Gatos District.
We expect to perform additional definition drilling to expand the Southeast and Northwest zones of the Cerro Los Gatos Mine and to perform additional drilling to expand the Esther and Amapola deposits, which remain open to extensions at depth. In addition to the Cerro Los Gatos Mine, the Esther deposit and the Amapola deposit, we have identified 11 other mineralized zones defined by
high-grade drill intersections in the Los Gatos District. Grade intercepts from such mineralized zones are shown below.
Mineralized Zones Grade Intercepts
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 | |||||||||
The table above does not include Ocelote and Wall-E/Ava zones, as they do not have sufficient drilling.
Subject to financing, our objectives at the Los Gatos Project asDistrict are to, among other things:
Deposit | Tonnes | Average Grade Ag (g/T) | Average Grade Pb (%) | Average Grade Zn (%) | ||||
Cerro Los Gatos | 5,270,000 | 179 | 2.0% | 4.2% | ||||
Esther | 620,000 | 113 | 0.6% | 1.7% | ||||
Amapola | 480,000 | 101 | 0.1% | 0.2% |
Other Idaho Properties
The Company owns or controls a portfolio of four additional greenfield exploration properties in Idaho, including Sun South, East Silver Belt, Silver Hill and Falls Creek Adit. The Company believes that each of these properties contains high grade silver veins. The locations of the properties are showntechnical work on the map below.property with the objective of completing a scoping study on the Esther and Amapola deposits;
Other Mexican Properties
The Company owns or controls a portfolio of 19 other exploration properties in Mexico covering an area of 420,895 hectares, with significant additional hectares under application for mineral concession. There are three projects underway with significant drill results, El Doctor (skarn and vein silver) in Oaxaca, Santa Valeria (epithermal vein silver) in Chihuahua and Zacatlan (disseminated and vein silver) in Puebla. Additional drilling is planned at these projects as well as additional targets through 2013. The Company is planning sufficient drilling in an effort to outline continuous geometry of mineralization at El Doctor, Santa Valeria and Zacatlan which could lead to initial estimates of mineralized material.
Other notable projects include Mine Grande (vein and disseminated silver), Los Cuates (epithermal vein silver), Las Coloradas (vein and replacement silver), San Fermin (skarn and vein silver), San Jose de Minas (disseminated and vein silver) and Pablito (epithermal vein silver). All these properties are without known reserves and are exploratory in nature. The locations of these properties are indicated in the map below.
Recent Developments
Exploration drillingQuality assurance at the SunshineCerro Los Gatos Mine property in Idaho from accessible underground workings has resulted in the discovery of a new deeper vein referred to as the “10 vein,” a mineralized extension to the Sunshine vein in a previously unexplored area and continuity of the South Yankee Boy and Yankee Boy Split veins. Results from recent drilling are as follows:
Hole | From | To (meters) | Thickness | Ag (g/t) | Cu (%) | Pb (%) | Vein | |||||||
ST2627 | 226.37 | 227.74 | 1.37 | 227.0 | 0.1 | 0.0 | Sunshine | |||||||
ST2627 | 293.75 | 294.75 | 1.0 | 495.0 | 0.65 | 0.51 | 10 | |||||||
ST2628 | 262.13 | 262.98 | 0.85 | 1379.0 | 0.99 | 0.0 | Sunshine | |||||||
ST2628 | 332.41 | 334.91 | 2.5 | 554.0 | 0.25 | 6.7 | 10 | |||||||
ST2629 | 206.58 | 208.88 | 2.3 | 2445.0 | 0.76 | 0.02 | Sunshine | |||||||
ST2629 | 265.42 | 266.37 | 0.95 | 220.0 | 0.09 | 0.45 | 10 | |||||||
ST2630 | 216.18 | 217.66 | 1.48 | 2334.6 | 0.10 | 0.01 | Sunshine | |||||||
ST2630 | 278.35 | 280.45 | 2.10 | 45.0 | 0.01 | 1.27 | 10 | |||||||
ST2631 | 228.96 | 229.11 | 0.15 | 2191.0 | 1.00 | 0.16 | Sunshine | |||||||
ST2631 | 294.73 | 295.86 | 1.13 | 1234.0 | 0.1 | 57.4 | 10 | |||||||
ST2632 | 241.49 | 242.37 | 0.88 | 303.0 | 0.1 | 0.0 | Sunshine | |||||||
ST2634 | 220.64 | 221.55 | 0.91 | 252.0 | 0.07 | 0.00 | Sunshine | |||||||
ST2635 | 225.64 | 225.85 | 0.21 | 316.0 | 0.09 | 0.08 | Sunshine | |||||||
ST2635 | 284.91 | 288.51 | 3.60 | 250.0 | 0.07 | 6.90 | 10 | |||||||
ST2636 | 213.05 | 213.75 | 0.70 | 183.0 | 0.03 | 1.89 | Sunshine | |||||||
ST2637 | 245.9 | 247.4 | 1.50 | 429.0 | 0.23 | 0.02 | Sunshine | |||||||
ST2637 | 250.0 | 250.9 | 0.90 | 1422.0 | 1.00 | 0.08 | Sunshine | |||||||
ST2637 | 312.5 | 315.5 | 3.00 | 74.0 | 0.01 | 2.39 | 10 | |||||||
ST2638 | 265.4 | 266.3 | 0.9 | 778.0 | 0.42 | 0.00 | Sunshine | |||||||
ST2638 | 334.3 | 335.0 | 0.7 | 341.0 | 0.9 | 9.90 | 10 | |||||||
ST2640 | 233.7 | 233.9 | 0.2 | 1025 | 0.33 | 0.00 | Sunshine | |||||||
ST2641 | 224.9 | 226.7 | 1.8 | 2986.0 | 0.68 | 0.00 | Sunshine | |||||||
ST2642 | 220.4 | 220.5 | 0.1 | 792.0 | 0.29 | 0.73 | Sunshine | |||||||
ST2643 | 236.8 | 237.1 | 0.3 | 696.0 | 0.24 | 0.00 | Sunshine | |||||||
ST2644 | 258.3 | 260.7 | 2.4 | 292.0 | 0.16 | 0.02 | Sunshine | |||||||
ST2644 | 314.5 | 314.9 | 0.4 | 483.0 | 0.08 | 20.3 | 10 | |||||||
ST2646 | 168.0 | 168.8 | 0.8 | 276.0 | 0.10 | 0.00 | South Yankee Boy | |||||||
ST2647 | 86.6 | 86.8 | 0.2 | 242.0 | 0.38 | 0.00 | South Yankee Boy | |||||||
ST2648 | 90.2 | 90.3 | 0.1 | 7279.0 | 4.28 | 15.10 | South Yankee Boy | |||||||
ST2648 | 168.9 | 170.1 | 1.2 | 288.0 | 0.19 | 0.06 | South Yankee Boy | |||||||
ST2649 | 172.7 | 177.4 | 4.7 | 2251.0 | 0.58 | 2.20 | South Yankee Boy | |||||||
ST2650 | 184.6 | 185.1 | 0.5 | 210.0 | 0.10 | 0.45 | South Yankee Boy |
Holes ST2633, ST2639 and ST2645 did not detect significant mineralization.
Additional drilling is now focused on the exploration decline from the Sterling tunnel to further delineate mineralization encountered in both the upward vertical extension of the Sunshine vein and the newly discovered 10 vein.
This new drilling has taken place from a station along an exploration decline fromLos Gatos District involves the Sterling tunneluse of standard practice procedures for sample collection and includes oversight by experienced geological staff during data collection. Certain quality control measures for sample analysis include in-stream sample submittal of standard reference material, blank material and field duplicate sampling. For data verification, staff members observed drill hole locations and orientations, inspected drill cores and compared to help better define mineralizationlogs and analytical results, observed core intake, visited outcrops and discussed with on-site geologists, including reviewing working maps and cross-sections. Inherent risks in the “upper country” zones of the Sunshine Mine. Mineralization had been suggested in upward vertical extensions of the Sunshine vein, but drilling in this area was limited historically due to the lack of appropriately positioned drill stations. The advancement of the exploration decline from the
Sterling tunnel has permitted access, with the drills able to penetrate the Sunshine vein extension in a roughly perpendicular fashion. The new 10 vein has been discovered for the first time approximately 70 meters below and parallel to the Sunshine vein, with a higher lead content than the Sunshine vein.quality control include potential sample contamination, among others.
There is aggressive competition within the silverprecious metals industry. The Company competesWe compete in efforts to obtain financing to explore and develop its projects with other silverprecious metals companies, such as Coeur d’Alene Mines CorporationMining Inc., Pan American Silver Corp. and Hecla Mining Company,First Majestic Silver Corp., as well as other mineral miners including Stillwater Mining Company and Kinross Gold Corporation, some of whomminers. These companies currently have greater resources than the Company does.we do. In the future, the Companywe may compete with such companies to acquire additional properties.
In addition, the Companywe also encountersencounter competition for the hiring of key personnel. The mining industry is currently facing a shortage of experienced mining professionals, particularly with respect to experienced
mine construction and mine management personnel. This competition affects the Company’s operations at the Sunshine Mine property and the Los Gatos Project.our operations. Larger regional companies such as Coeur d’Alene Mines Corporation, Hecla Mining Company, Stillwater Mining Company and Kinross Gold Corporation in the Pacific Northwest can offer better employment terms as compared to smaller companies such as the Company.us.
The Company We also competescompete for mine service companies, in particularsuch as project coordinators and drilling companies. Potential suppliers may choose to provide better terms and scheduling to larger companies in the industry due to the scale and scope of their operations.
Environmental, Health and Safety Matters
The Company is We are subject to stringent and complex environmental laws, regulations and permits in the various jurisdictions in which it operates. These requirements are a significant consideration for the Companyus as itsour operations involve, or may in the future involve, among other things, the removal, extraction and processing of natural resources, emission and discharge of materials into the environment, remediation of soil and groundwater contamination, workplace health and safety, reclamation and closure of waste impoundments and other properties, and handling, storage, transport and disposal of wastes and hazardous materials. Compliance with these laws, regulations and permits can require substantial capital or operating costs or otherwise delay, limit or prohibit the Company’sour development or future operation of itsour properties. These laws, regulations and permits, and the enforcement and interpretation thereof, change frequently and generally have become more stringent over time. If the Company violateswe violate these environmental requirements it may be subject to litigation, fines or other sanctions, including the revocation of permits and suspension of operations. Pursuant to such requirements, the Companywe also may be subject to inspections or reviews by governmental authorities.
Permits and Approvals
Numerous environmental permits and approvals are required for the Company’s current and future operations. Many of these permits are subject to renewal from time to time and can impose strict conditions, requirements or obligations on, or otherwise delay or prohibit, certain activities.
In particular, the Company is subject to permitting requirements in connection with water discharges at the Sunshine Mine. The Company operates under a National Pollutant Discharge Elimination System, or NPDES, permit that expired in 1996 but has been administratively extended. The Company applied to the U.S. Environmental Protection Agency for a renewal of its NPDES permit in July 2007 and is awaiting a response. The NPDES permit covers, among other matters, the waste streams from mining and ore concentrating operations at the Sunshine Mine and drainage water from discontinued mining operations. Beginning in the 1990s, the predecessor began allowing the lower mined-out levels of the mine to flood, which resulted in elevated iron and manganese concentrations in the mine water. In the future, more stringent limits could be
imposed under the NPDES permit, whether as part of the permit renewal process or otherwise. The Company believes that it will incur significant costs to upgrade the existing wastewater treatment facility to meet more stringent permit limits, including those relating to total dissolved solids.
To obtain, maintain and renew its environmental permits, the Companywe may be required to conduct environmental studies and collect and present to governmental authorities data pertaining to the potential impact that its current or future operations may have upon the environment. For example, in order to commence underground exploration activities at the Cerro Los Gatos Project, the Company will needMine, we were required to submit an environmental analysis to the applicable governmental authorities. In May 2010, the Companywe began collection ofcollecting the environmental baseline data for the Cerro Los Gatos Project. The Company expects that data collected on flora, fauna, water, air, climate, securityMine and social impacts will be integrated into future environmental studies required forreceived the Los Gatos Project.
The Company will require additional permits and approvals to conduct future exploration, development and processing activities, including at both the Sunshine Mine property and the Los Gatos Project. Any failure to obtain, maintain or renew required permits, or other permitting delays or conditions, may delay, limit or prohibit its current or future operations.permit in 2015.
Hazardous Substances and Waste Management
The Company We could be liable for environmental contamination at or from itsour or its predecessors’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 off-site 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. In addition to potentially significant investigation and remediation costs, such matters can give rise to claims from governmental authorities and other third parties for fines or penalties, natural resource damages, personal injury and property damage.
In connection with the Sunshine Mine, the Company is involved in the Bunker Hill Superfund Site. Pursuant to a 2001 Consent Decree that resolved certain liabilities arising under the U.S. Comprehensive Environmental Response, Compensation and Liability Act relating to the Bunker Hill site, the Company is required to pay to the U.S. government and the Coeur d’Alene Indian tribe between a 0% (at a silver price below $6 per ounce) and 7% (at a silver price of $10 per ounce or higher) NSR royalty. This Consent Decree did not resolve all liabilities associated with the Bunker Hill site, including any liability for contamination at or migrating from the Company’s owned, leased or operated properties, which are located within the Bunker Hill Superfund Site. In addition, the U.S. Department of Justice has notified the Company that it believes that the Company is not entitled to the liability protections under the Consent Decree. The Company may incur additional costs, liabilities or obligations in connection with the Bunker Hill site.
The tailings pond at the Sunshine Mine currently receives mine water and process water discharges from the Company’s operations, as well as similar discharges from the nearby Crescent Mine. The Company expects that the capacity of the tailings pond as currently configured will be sufficient for approximately ten years after commercial production resumes and that additional capacity may be added thereafter by increasing the height of the pond dam.
The Company is required to maintain financial assurances for certain future closure obligations, including closure obligations with respect to the tailings pond at the Sunshine Mine. As of December 31, 2012, the Company has recorded an asset retirement obligation of approximately $862 that reflects the estimated present value of future closure obligations.
Mine Health and Safety Laws
The Federal Mine Safety and Health Act of 1977 and the Occupational Safety and Health Act of 1970 impose stringent safety and health standards on all aspects of mining operations at the Sunshine Mine property.
Also, Idaho has state programs for mine safety and health regulation and enforcement. In addition, the Company’s Our Mexican properties are subject to regulation by the Political Constitution of the Mexican United 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. Mining, environmental and labor authorities may inspect the Company’sour operations on a regular basis and issue various citations and orders when they believe a violation has occurred under the relevant statute. Regulations and the results of inspections, whether in the United States or Mexico, may have a significant effect on the Company’sour operating costs.
Legislative and regulatory bodies at the federal and state levels, including MSHA and OSHA, have recently promulgated or proposed various new statutes, regulations and policies relating to mine safety and mine emergency issues. Although some new laws, regulations and policies are in place, these legislative and regulatory efforts are still ongoing. At this time, it is not possible to predict the full effect that the new or proposed statutes, regulations and policies will have on the Company’sour operating costs, but it may increase its costs and those of its competitors.
Other Environmental Laws
The Company is We are required to comply with numerous other foreign, federal, state and local environmental laws, regulations and permits in addition to those previously discussed. These additional requirements include, for example, the U.S. Emergency Planning and Community Right-to-Know Act and Resource Conservation and Recovery Act and various permits regulating road construction and drilling at the Company’s Los Gatos, El Doctor, Mina GrandeMexican properties.
We endeavor to conduct our mining operations in compliance with all applicable laws and Zacatlan zones.regulations. However, because of extensive and comprehensive regulatory requirements, violations during mining operations occur from time to time in the industry.
As discussed above, the Company owns We own and leaseslease land at the Sunshine Mine property, the Los Gatos Project and the Company’sour other exploration properties in Mexico. The Company also leases its executive office spaceMexico and at 370 17th Street, Suite 3800, Denver, Colorado, which lease expires on July 31, 2017, subject to a renewal option.the Los Gatos District through our ownership interest in the LGJV.
As of December 31, 2012, the CompanyJune 30, 2020, we had 5710 full-time employees in the United States and 8410 full-time employees in Mexico, and the LGJV had approximately 540 employees in Mexico. The Company also has a services agreement, which will continue following the offering, with The Electrum Group LLC and several consultantsWe believe that provide additional management, accounting and financial services. See “Certain Relationships and Related Party Transactions.” The Company believes that itsour employee relations are good and plansplan to continue to hire employees as itsour operations expand. The Company expects the number of employees to increase following the offering as it increases its exploration efforts and prepares to operate as a public company. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Operating Expenses—Exploration Expenses.”
From time to time, the Companywe and our affiliates may become subject to various legal proceedings that are incidental to the ordinary conduct of its business. Although the Companywe cannot accurately predict the amount of any liability that may ultimately arise with respect to any of these matters, it makeswe make a provision for potential liabilities when it deemswe deem them probable and reasonably estimable. These provisions are based on current information and legal advice and may be adjusted from time to time according to developments.
Stonehill Capital Management LLC See Note 10, "Commitments and Highwood Partners, LP, or the Lenders, as debtors-in-possession, or DIP, lenders to SPMI, a prior owner of the Sunshine Mine, have asserted a mortgage claim against certain of the property at the Sunshine Mine that the Company acquired from SPMIContingencies" in June 2010. The DIP financing loan was made in connection with SPMI’s bankruptcy in 2000, in the amount of $5 million, but the Lenders claim that they were owed $71.2 million as of March 31, 2011, including accrued interest and penalties, and further, that this
amount continues to accrue interest at a compounded rate of 25%. Additionally, they are seeking an award of their attorneys’ fees and costs. The Company filed a complaint in the District Court of Shoshone County, Idaho, on September 23, 2010 to declare the alleged mortgage unenforceable. The Lenders filed an action before the same court to enforce the mortgage. The two actions have been consolidated. Following the conclusion of pre-trial discovery, the Company and the Lenders submitted motions for summary judgment, which were argued before the Court on April 17, 2012. The Court issued a written order on the motions on April 19, 2012, or the Order. In its Order, the Court partially denied and partially granted each parties’ motions, holding that the Lenders’ mortgage was generally enforceable but that the Lenders were obligated, under a prior 2003 agreement with SPMI and certain of its affiliates, to release their mortgage and other liens upon receipt of an amount, or the Net Proceeds, to be determined by the Court in a subsequent hearing. For the purpose of avoiding the cost and delay inherent in conducting a further hearing and to progress the case toward a final court judgment, the Parties have stipulated that the Net Proceeds owed are $2.725 million. At a status conference held on October 5, 2012, the Court refused the Lenders’ request to certify the Order as a final order, in light of certain remaining issues between the Lenders and another party. These issues do not involve the Company’s property. A hearing to resolve all such remaining issues was scheduled for November 7, 2012, but the parties involved engaged in settlement talks and requested an adjournment of the hearing until their settlement was complete. Following such settlement, the Court is expected to enter its final judgment after which both parties have the right to appeal the Court’s April 19, 2012 summary judgment order. A hearing to determine the possible award of attorneys’ fees and costs was heldour consolidated financial statements included elsewhere in this case on November 19, 2012, at which time the Court held that no party was entitled to its attorneys’ fees and costs. On February 20, 2013, the Court held a hearing to determine termsprospectus for additional information regarding our assessment of the final judgment, and a final judgment resolving the claims is expected in the near term. The Company does not believe that this matter is likely to have a material adverse effect on its operations or financial condition. Litigation is inherently unpredictable, however, and while the Company believes it has valid arguments and defenses should the matter be reviewed on appeal, there can be no assurance as to the ultimate outcome of this action.
The Company is from time to time involved in various legal proceedingscontingencies related to its business. Except in the above-described proceeding, 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 effectlegal matters.
Table of the Company’s financial condition or results of operations.
Executive Officers and Directors
The following table sets forth information regarding theour executive officers directors and director nominees of Sunshine Silver,directors, as of the date of this prospectus:June 30, 2020:
Name | Age | Position | ||||
|---|---|---|---|---|---|---|
| 65 | Chief Executive Officer and Director | ||||
| Philip Pyle | 64 | Vice President of Exploration and Chief Geologist | ||||
| ||||||
| 62 | Executive | ||||
Roger Johnson | 63 | Chief Financial Officer | ||||
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| Janice Stairs(3) | 61 | Lead Director | |||
| 55 | Director | ||||
| 55 | Director | ||||
| Director | |||||
| Karl Hanneman | 62 | Director | ||||
| Charles Hansard(4) | 72 | Director Nominee | ||||
| Igor Levental | 64 | Director | ||||
| David Peat | 67 | Director |
Stephen Orr, 65,has served as our Executive Chairman since May 2011 and Chief Executive Officer since June 2011.2011 and has served on our Board of Directors since May 2011, including as our Executive Chairman from May 2011 to January 2020. Mr. Orr has 35more than 40 years of experience in the mining industry, including international commercial experience at both executive and operational levels. Most recently,Previously, Mr. Orr was President, Directorserved as president, director and Chief Executive Officerchief executive officer at Ventana Gold Corp., a Vancouver-based mineral exploration and development company. Prior to joining Ventana Gold Corp. in September 2009, Mr. Orr was a Directorcompany, as director and Chief Executive Officer ofchief executive officer at OceanaGold, Limited, a position he held for five years, where under his leadership OceanaGold built and commissioned two new mines in New Zealand, and increased production by 90%. Prior to that time, Mr. Orr was Vice Presidentas vice president of North American Operations,operations and then Managing Directormanaging director of Australia and Africa operations forat Barrick Gold Corporation. Before joining Barrick, he spent 20 years with Homestake Mining Company in a number of increasingly senior positions, including PresidentCorporation and Chief Executive Officer foras president and chief executive officer at Homestake Canada Inc. Since June 2010, Mr. Orr has beenis a Directorresident of GoldQuest Mining Corp.Dallas, Texas. We believe that Mr. Orr’s more than 30 years ofOrr's extensive experience in the international mining industry at both executive and operational levels rendersmakes him qualified to be onea valuable member of our Board of Directors.
Philip Pyle, 64, has served as our Vice President of Exploration since June 2011 and has served as our Chief Geologist since January 2020. Mr. OrrPyle has more than 40 years of experience in the mining industry. Previously, Mr. Pyle served as vice president—exploration at Los Gatos Ltd., as exploration manager at Linear Gold Corp. (now Fortune Bay Corp.), as exploration manager at MIM Exploration Pty Ltd., as exploration manager at BHP Minerals International Exploration Inc. and as a geologist at AMAX Exploration Inc. Mr. Pyle holds a B.A. in Earth Science from Dartmouth College and a
Masters in Geological Science from the University of Texas. Mr. Pyle is a resident of Vancouver, British Columbia, Canada.Bozeman, Montana.
John Kinyon, 62, was appointed as our Executive Vice President of Operations in April 2016 and has served as our Vice President of Operations since 2012. Mr. Kinyon has more than 40 years of U.S. and international operations and construction experience, including experience in various mining positions in the U.S., Canada, Tanzania, Australia, and New Zealand. From April 2011 to March 2012, Mr. Kinyon served as vice president and general manager at Coeur Mining Inc.'s Kensington Mine in Juneau, Alaska. Previously, Mr. Kinyon served as vice president of operations at OceanaGold, as general manager at Yukon Zinc and as general manager at Eskay Creek at Barrick Gold Corporation. Mr. Kinyon holds a B.S. in Engineering and Business Science from South Dakota State University and Black Hills University. Mr. Kinyon is a resident of Coeur d'Alene, Idaho.
Roger Johnson, 63, was appointed has served as our Chief Financial Officer insince March 2011. Mr. Johnson previouslyalso serves as a Governor-appointed member of the Colorado PERA Board of Trustees. Mr. Johnson has more than 40 years of financial management experience in the mining industry. Previously, Mr. Johnson served in a number of senior roles foras vice president and chief accounting officer at Newmont Mining Corporation, from 2003-2011, most recently as Vice Presidentsenior vice president, finance and Chief Accounting Officer from 2008-2011. Mr. Johnson also served as Senior Vice President, Finance and Administrationadministration at Pasminco Zinc, Inc. in 2002 and 2003. He also served in a number of senior roles, including, as Vice President, Controller, forvice president, controller at Kennecott Utah Copper Corporation, a major business unit of Rio Tinto plc, from 1989-2002. Prior to joining Rio Tinto, Mr. JohnsonLLC and practiced public accounting for ten years with Coopers & Lybrand (now PricewaterhouseCoopers LLP). Mr. Johnson is a Certified Public Accountant. He has two degreesMr. Johnson holds a B.S. in Accounting and a Master of Professional Accountancy degree from the University of Utah, a Masters of Professional Accountancy and a B.S. in Accounting.Utah. Mr. Johnson is a resident of Denver, Colorado.
John GalassiniLuis Felipe Huerta, 50, was appointed Chief Operation Officer in August 2011. Mr. Galassini has served as Regional Vice President, North American Operations for Kinross Gold Corporation from 2009 to 2011. In this role, he was responsible for allProject Director of the company’s explorationCerro Los Gatos Mine since May 2015. Mr. Huerta has more than 20 years of project management experience in the mining industry. From 2012 to 2014, Mr. Huerta served as project manager at Continental Gold Inc. Previously, Mr. Huerta served as project manager at Fortuna Silver Mines Inc. and mining operationsas project superintendent at Compañía Minera Milpo. Mr. Huerta holds a Bachelors in North America. Prior to joining Kinross Gold Corporation,Engineering Science and a Masters in Project Management from ESAN Graduate School of Business. Mr. Galassini had a 22-year career with Phelps Dodge (now Freeport McMoRan). He held various positions of increasing responsibility, including assignments with Phelps Dodge in Arizona, New Mexico and Chile. In 2006 he was named Senior Vice-President, North America, and in 2007 was appointed
Senior Vice-President, Americas. Mr. Galassini served on the Board of Directors for the National Mining Association, and is a member of the Society for Mining, Metallurgy, and Exploration, or SME. He is past chairman of the Morenci Section of SME, and in 2006 he was named Distinguished Alumnus at the College of Engineering at New Mexico State University. Mr. Galassini received his Bachelor of Science degree in chemical engineering from New Mexico State University. Mr. GalassiniHuerta is a resident of Denver, Colorado.Chihuahua, Mexico.
Philip PyleAdam Dubas, 41,was appointed Vice President Exploration in June 2011. Mr. Pyle has served as Vice President – Exploration for Los Gatos Ltd.our Chief Administrative Officer since June 2008.January 2019. Mr. Pyle previously servedDubas has more than 20 years of experience in the role of Exploration Manager for Linear Gold Corp. (now Brigus Gold Corp.) from September 2003financial management. From 2011 to June 2008.December 2018, Mr. PyleDubas served as Exploration manager for MIM Exploration Pty Ltd. from June 1997 to September 2003.our Corporate Controller. Previously, Mr. Pyle served as Exploration Manager for BHP Minerals International Exploration Inc. from 1985 to 1997. He alsoDubas served as a geologist for AMAX Exploration Inc. from 1979 to 1985. Mr. Pyle is a resident of Houston, Texas.
Jeffrey Reeser was appointed General Counsel in July 2011. Mr. Reeser previously served as Vice President and Corporate Secretary of Newmont Mining Corporation between 2007-2011. Prior to joining Newmont, Mr. Reeser was legal directorsenior manager at Sun Microsystems, a Fortune 500 technology company, where he was lead counsel responsible for establishing and managing legal support for the company’s global joint ventures and technical services organizations. Prior to this, Mr. Reeser practiced law for seven years as a partner and associate at the law firms of Baker & Hostetler,KPMG LLP, and Parcel, Mauro, Hultin & Spaanstra, P.C., where he focused on mining lawthe energy industry, and corporate matters for various regional and multinational natural resources companies. Heas an international financial analyst at Sprint Corporation. Mr. Dubas holds two degreesa B.S. in Business Administration, with highest distinction, from the University of Colorado, a J.D. from the School of Law and a B.S. (with honors) in business finance. Mr ReeserNebraska. Mr. Dubas is a resident of Denver, Colorado.
John EllisThomas S. Kaplan, 57, has served as the Chairman of our Board of Directors since January 2020. In addition to our Board of Directors, Dr. Kaplan also serves on the board of directors of NOVAGOLD Resources Inc. Dr. Kaplan has over 25 years of experience in the resources sector. Since 2012, Dr. Kaplan has served as the chairman and chief executive officer of The Electrum Group LLC, a privately-held global natural resources investment management company. Previously, Dr. Kaplan served as chairman of Leor Exploration & Production LLC, a natural gas exploration and development company, which he founded in 2003 and sold in 2007 to EnCana Corporation. In addition, Dr. Kaplan has served as chairman of the board of directors of Electrum Special Acquisition Corporation and Trilogy Metals Inc. (formerly known as NovaCopper Inc.). A prominent preservationist of wildlife and cultural heritage, he is the founder and chairman of Panthera, a global leader in big cat conservation, and also serves as chairman of the International Alliance for the Protection of Heritage in Conflict Areas (ALIPH), a multilateral organization co-founded by the governments of France and the United Arab Emirates. Dr. Kaplan holds a B.A., M.A. and D.Phil. in modern history from Oxford University. Dr. Kaplan is a resident of New York, New York. Dr. Kaplan intends to resign from the Board of
Directors contingent upon and effective immediately prior to the effectiveness of the registration statement of which this prospectus forms a part.
Janice Stairs, 61, has served as a member of our Board of Directors since October 2019 and has served as Lead Director of our Board of Directors since January 2020. In addition to our Board of Directors, Ms. Stairs also serves on the board of directors of Gabriel Resources Ltd., Trilogy Metals Inc., and Marathon Gold Corporation. Ms. Stairs has more than 30 years of experience in the resources sector. From 2011 until 2019, Ms. Stairs served as general counsel and corporate secretary at Namibia Critical Metals Inc. Previously, Ms. Stairs served as general counsel at Endeavour Mining Corporation, as vice president and general counsel at Etruscan Resources Inc., and as partner at the law firm McInnes Cooper (formerly Patterson Palmer). In addition, Ms. Stairs has served on the board of directors of AuRico Gold Inc. and AuRico Metals Inc. Ms. Stairs holds a LL.B. from Dalhousie University and a M.B.A. from Queen's University. Ms. Stairs is a resident of Halifax, Nova Scotia. We believe that Ms. Stairs' academic training in law and business and her extensive experience in the resources sector make her a valuable addition to our Board of Directors. Ms. Stairs will become the Chair of the Board of Directors immediately prior to the effectiveness of the registration statement of which this prospectus forms a part.
Jeb Burns, 55, has served as a member of our Board of Directors since March 2018. In addition to our Board of Directors, Mr. Burns also serves on the investment committee of Western Michigan University Foundation, the board of directors of Pacific Pension & Investment Institute, the board of directors of the Michigan History Foundation, the board of trustees of Mackinac Associates, and the board of directors of Venture Michigan Fund. Mr. Burns has nearly 20 years of investment and asset management experience. Since February 2001, Mr. Burns has been the chief investment officer at Municipal Employees' Retirement System of Michigan. Previously, Mr. Burns held positions in public policy, communications, budget, and legislative affairs at the State of Michigan. Mr. Burns holds a B.A. in History and Political Science from Western Michigan University and a M.P.A. in Public Administration and Public Policy from Wayne State University. Mr. Burns is a resident of Lansing, Michigan. Mr. Burns intends to resign from the Board of Directors contingent upon and effective immediately prior to the effectiveness of the registration statement of which this prospectus forms a part.
Ali Erfan, 55, has served as a member of our Board of Directors since May 2019. In addition to our Board of Directors, Mr. Erfan serves on the board of directors of Leor Energy, Electrum Ltd., TTI Inc., Augustus Ltd., Gabriel Resources Ltd. and Reebonz Holding Limited. Mr. Erfan has more than 20 years of experience in senior roles in the venture capital and private equity industry. Since 2007, Mr. Erfan has served as a director of The Electrum Group, a privately-held global natural resources investment management company, and since 2017, Mr. Erfan has served as vice chairman of The Electrum Group. Previously, Mr. Erfan served as a senior partner at 3i Group, Plc. Mr. Erfan founded the Cogito Scholarship Foundation, a U.K. charity. Mr. Erfan holds an M.B.A. from the London Business School and a B.A. and an M.A. in Politics, Philosophy and Economics from Oxford University. Mr. Erfan is a resident of Monaco. We believe that Mr. Erfan's extensive experience in finance and our industry makes him a valuable addition to our Board of Directors.
Igor Gonzales, 65, has served as a member of our Board of Directors since June 2020. In addition to our Board of Directors, Mr. Gonzales serves on the board of directors of Hudbay Minerals Inc. and Harte Gold Corp. Mr. Gonzales has more than 30 years of experience in the mining industry. Since June 2020, Mr. Gonzales has served as the chief operating officer at Appian Capital Advisory, a leading investment advisor in the metals and mining industry. From June 2017 to May 2020, Mr. Gonzales served as the president and chief executive officer at Sierra Metals Inc. From November 2014 to April 2017, Mr. Gonzales served as the chief operating officer at Companiade Minas Buenaventura. Previously, Mr. Gonzales served as the executive vice president and chief operating officer at Barrick Gold Corporation and in various roles with Southern Peru Copper Corporation. In addition,
Mr. Gonzales has served on the board of directors of Compañia de Minas Buenaventura and Cia Minera El Brocal. Mr. Gonzales holds a B.S. in Chemical Engineering from the University of San Antonio Abad in Cusco, Peru, and an M.S. in Extractive Metallurgy from the New Mexico Institute of Mining and Technology, where he was a Fulbright Scholar. Mr. Gonzales is a resident of Lima, Peru. We believe that Mr. Gonzales' extensive experience in our industry makes him a valuable addition to our Board of Directors.
Karl Hanneman, 62, has served as a member of our Board of Directors since October 2019. In addition to our Board of Directors, Mr. Kanneman also serves on the board of directors of International Tower Hill Mines, Ltd., Usibelli Coal Mine, Inc. and Northrim BanCorp, Inc. Mr. Hanneman has more than 35 years of mining industry management and technical experience as an executive, manager, mining engineer, mine operator and entrepreneur. Since February 2017, Mr. Hanneman has served as chief executive officer of International Tower Hill Mines, Ltd., where he leads a team advancing a 10-million-ounce gold resource in Alaska through project optimization. From March 2015 to February 2017, Mr. Hanneman served as chief operating officer of International Tower Hill Mines, Ltd. Previously, Mr. Hanneman served as general manager and project manager of International Tower Hill Mines, Ltd. and as director, corporate affairs, Alaska and as Alaska regional manager at Teck Resources Ltd., including being responsible for overseeing the $350 million Pogo Gold project throughout the period of underground exploration, feasibility study, project design and permitting. Mr. Hanneman holds a B.S. in Mining Engineering, magna cum laude, from the University of Alaska. Mr. Hanneman is a resident of Fairbanks, Alaska. We believe that Mr. Hanneman's extensive experience in our industry makes him a valuable addition to our Board of Directors.
Charles Hansard, 72, will become a member of our Board of Directors contingent upon and effective immediately prior to the effectiveness of the registration statement of which this prospectus forms a part. In addition to our Board of Directors, Mr. Hansard also serves on the board of directors of Baker Steel Resources Trust Limited, Electrum Limited and Moore Global Investments Limited. Mr. Hansard has more than 25 years of experience in corporate governance at the board of directors level. Mr. Hansard served as the chairman of African Platinum Plc, which he led through reorganization and feasibility prior to its acquisition by Impala Platinum Ltd., and has served on the board of directors of AIG Asset Management (Europe) Ltd., Apex Silver Mines Limited and Deutsche Global Liquidity PLC. Mr. Hansard holds a B.B.S. from Trinity College Dublin. Mr. Hansard is a resident of London, U.K. We believe that Mr. Hansard's extensive experience in corporate governance makes him a valuable addition to our Board of Directors.
Igor Levental, 64, has served as a member of our Board of Directors since April 2019. In addition to our Board of Directors, Mr. Levental serves on the board of directors of NOVAGOLD Resources Inc. Mr. Levental has more than 30 years of experience across a broad cross-section of the international mining industry. Since February 2010, Mr. Levental has served as president of The Electrum Group LLC, a privately-held global natural resources investment management company. Previously, Mr. Levental has held senior executive positions with major mining companies, including Homestake Mining Company and International Corona Corp. In addition, Mr. Levental has served on boards of directors of several other mineral explorers and developers, including Gabriel Resources Ltd. and NovaCopper Inc. (now Trilogy Metals Inc.). Mr. Levental is a professional engineer of the Province of Ontario. Mr. Levental holds a B.S. in Chemical Engineering and an M.B.A. from the University of Alberta. Mr. Levental is a resident of Denver, Colorado. We believe that Mr. Levental's extensive experience in finance and our industry makes him a valuable addition to our Board of Directors.
David Peat, 67,has served as a member of our Board of Directors since September 2011. Mr. Ellis is a professional engineer registered in British Columbia. He has worked in senior management positions in the mining industry for the past 45 years, including the past 11 years as a consultant. He was a Director of the Mining Association of Manitoba, the Mining Association of Canada and the National Mining Association. He has served as Director of Anglogold North America Inc., Hudson Bay Mining and Smelting Company, Inc., Inspiration Resources Corp., Cashman Equipment Co., Queenstake Resources, Ltd., Lunden L.C., Mexivada Mining Corp., Canadian Potash Corp. and Royal Coal Corp. Royal Coal Corp. became subject to a cease trade order after Mr. Ellis resigned from its board of directors. The cease trade order was issued for failure to file audited annual financial statements during a period when Mr. Ellis served as director. The cease trade order remains in effect. Mr. Ellis was Chairman and CEO of Anglogold North America Inc., Independence Mining Company, Inc., Hudson Bay Mining and Smelting Co., Limited and was Senior Vice-President of Inspiration Resources Corp., Inspiration Copper Co. and Inspiration Coal Inc. He was also Vice-President of Operations for CVRD-Inco PTI Indonesia and Managing Director CVRD-Inco for Voisey’s Bay Nickel Company. For the past 11 years he has consulted for AngloGold Ashanti Limited, CVRD-Inco, Queenstake Resources, Ltd., BHP Billiton Ltd., Century Aluminum Company, NovaGold Resources Inc. and a number of other companies. Mr. Ellis graduated from Haileybury School of Mines and from Montana University of Science and Technology with a degree in Metallurgy. Mr. Ellis’ academic training in the field of metallurgy, plus his many years of experience in the mining industry, in both technical and managerial positions, render him qualified to serve as one of our Directors. Mr. Ellis is a resident of Spring Creek, Nevada.
Marc Faberhas served as a member of our Board of Directors since September 2011. Dr. Faber has over 35 years of experience in the finance industry and is the Managing Director of Marc Faber Ltd., an investment advisory and fund management firm. He is an advisor to a number of private investment funds and serves as a Director of Sprott Inc., Ivanhoe Mines Ltd. and NovaGold Resources Inc. Dr. Faber publishes a widely read monthly investment newsletter entitled The Gloom, Boom & Doom Report and is the author of several books including Tomorrow’s Gold—Asia’s Age of Discovery. A renowned commentator on global market trends and developments, he is also a regular contributor to several leading financial publications around the world, including Barron’s, where he is a member of the Barron’s Roundtable. Dr. Faber received his Ph.D. in Economics magna cum laude from the University of Zurich. Through his many years of experience in the finance
and investment management industry, Dr. Faber provides our Board of Directors with financial analysis, risk management and strategic expertise, which render him qualified to serve as one of our Directors. Mr. Faber is a resident of Chiangmai, Thailand.
Wayne Kirkhas served as a member of our Board of Directors since September 2011. Mr. Kirk currently holds directorships and is the Chairman of the Nominating and Corporate Governance Committees at each of Anooraq Resources Corporation, Gabriel Resources Ltd., Northern Dynasty Minerals Ltd. and Taseko Mines Ltd. He is also Chairman of the Corporate Governance and Nominating Committee and Compensation Committee of Electrum Ltd. Mr. Kirk spent 26 years specializing in corporate and business law, including mergers and acquisitions, securities law and mining, with the firm of Thelen, Marrin Johnson & Bridges in San Francisco, California. From 1992-2001, he was Vice President, General Counsel and Corporate Secretary for Homestake Mining Company, which was acquired by Barrick Gold Corporation in December 2001. From 2002 until his retirement in 2004, Mr. Kirk was Special Counsel at Thelen Reid & Priest LLP, where he specialized in corporate and business law, including public company corporate governance. Mr. Kirk was a director of Great Basin Gold Ltd. within one year prior to such company becoming bankrupt. Mr. Kirk holds a B.A. in Economics from the University of California-Berkeley and an LL.B. from Harvard Law School. Mr. Kirk’s legal training and experience as a seasoned corporate and business lawyer, as well as his expertise in public company corporate governance, render him qualified to serve as one of our Directors. Mr. Kirk is a resident of Orcas, Washington.
William Natbonyhas served as a member of our Board of Directors since June 2011. Mr. Natbony is Chairman and Chief Executive Officer of Tigris Group Inc. and, from May 2007 to December 2012, was the Chief Executive Officer of Tigris Financial Group Ltd. Prior to joining Tigris Financial Group Ltd., Mr. Natbony was a senior partner at the international law firm of Katten Muchin Rosenman LLP. Mr. Natbony serves on the Advisory Board of the Mount Sinai Department of Medicine and is a member of the Board of Directors of Panthera Corp. and The Orianne Society, charities that are leaders in their areas of conservation and environmental preservation. Mr. Natbony received a B.A., cum laude, from Queens College of the City University of New York, a J.D. from NYU School of Law and an LL.M. (in Taxation) from NYU School of Law. He was a Research fellow at Yale Law School and Professor at New York Law School. Mr. Natbony bringsIn addition to our Board of Directors, his eclectic mix of experience as a chairman of a financial services company, a senior partner of an international law firm and a board member of numerous organizations in both private and public sectors, which renders him qualified to be one of our Directors. Mr. Natbony is a resident of Old Westbury, New York.
Michael S. Parretthas served as a member of our Board of Directors since September 2011. Mr. Parrett has served as a member of the Board of Directors of Pengrowth Corporation since 2004 and of Stillwater Mining Company since 2009. In June 2011, he was appointed Chairman of Mongolia Minerals Corporation, a private corporation. He wasPeat also serves on the Boardboard of Directorsdirectors of Gabriel Resources Ltd. from 2003-2010 and was Chairman from December 2005 through 2010. From 2003 until 2008, Mr. Parrett was a Director and Trustee of Fording Canadian Coal Trust. During 2002-2003 and the first quarter of 2004, Mr. Parrett served as a financial consultant to Stillwater Mining Company. From 1990-2001 he was, at various times, Chief Financial Officer, President of Rio Algom Mining Corp. and Chief Executive of BHP Billiton Base Metals. From 1983-1989 Mr. Parrett performed various financial functions, including Controller, Chief Financial Officer, Treasurer, Controller Marketing and Director Internal Audit at Falconbridge Limited. Mr. Parrett is a chartered accountant and received his B.A. from York University. Mr. Parrett’s accounting background, plus his past executive roles in and his services on the boards of various mining companies, render him qualified to serve as one of our Directors. Mr. Parrett is a resident of Aurora, Ontario, Canada.
David Peat has served as a member of our Board of Directors since September 2011. Mr. Peat has over 25more than 30 years of experience in financial leadership in support of mining corporations. Since 2006, he has been a Director and Chairman of the Audit Committee of Brigus Gold Corp. He has also been a Director and Chairman of the Audit Committee of Gabriel Resources Ltd., since 2010. Mr. Peat was Acting Chief Financial Officer of Gabriel Resources Ltd. from December 10, 2010 through March 9, 2011. Mr. Peat was Vice Presidentpreviously served as vice president and Chief
Financial Officer ofchief financial officer at Frontera Copper Corporation, from 2006-2009, Vice Presidentas vice president and Global Controller ofglobal controller at Newmont Mining Corporation from 2002-2004, and Vice Presidentas
vice president of finance and Chief Financial Officer ofchief financial officer at Homestake Mining Company from 1999-2002.Company. In addition, Mr. Peat started his career with Price Waterhouse in Torontohas served on the board of directors of Electrum Special Acquisition Corporation, AQM Copper Inc., Fortune Bay Corp. and he has beenBigus Gold Corp. Mr. Peat is a member of the Institute of Chartered Professional Accountants of Ontario since 1978. He received hisOntario. Mr. Peat holds a B.Com., Honors in Business Administration from the University of Windsor in 1976 and a B.A., in Economics from the University of Western Ontario in 1975.Ontario. Mr. Peat’sPeat is a resident of Fernandina Beach, Florida. We believe that Mr. Peat's academic training in business and economics and his extensive experience in corporate finance and accounting rendermake him qualified to serve as one of our Directors. Mr. Peat is a resident of Fernandina Beach, Florida.
Diana Waltershas served as a member of our Board of Directors since June 2011, and was designated by Liberty Metals & Mining and electedvaluable addition to our Board of Directors based on a stockholders agreement which will terminate immediately prior to the closing of this offering. Ms. Walters is the President and Chief Executive Officer of Liberty Metals & Mining and has over 20 years of experience in management positions with energy and mining companies. Liberty Metals & Mining is a wholly-owned subsidiary of Liberty Mutual Group, and makes investments in the metals and mining sector. Before joining Liberty Mutual Group, Ms. Walters was a Managing Partner of Eland Partners, LLC, a natural resources advisory firm from 2007-2010. Prior to that, Ms. Walters was Managing Director for the Global Investment Banking Resources and Energy Group of HSBC Securities (USA) Inc. in New York from 2004-2007. From 1987-2007, Ms. Walters held various management positions in financial institutions in New York and Texas where her major emphasis was corporate finance origination and execution for international and independent energy and mining companies. Ms. Walters currently serves as an independent Director of Allana Potash Corp. Ms. Walters graduated from the University of Texas at Austin with a B.A. in Plan II and an M.A. in Energy and Mineral Resources. Ms. Walters’ academic training in energy and mineral resources, her many years of experience in management positions with energy and mining companies and her prior leadership roles in various financial institutions render her qualified to serve as one of our Directors. Ms. Walters is a resident of North Salem, New York.
Board Composition
Our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws will provide that our Board of Directors shall consist of not less than three directors and not more than 12 directors, and the number of directors may be changed only by resolution adopted by the affirmative vote of a majority of the entire Board of Directors. Upon the conclusion of this offering, we will have eight directors: Janice Stairs, Ali Erfan, Igor Gonzales, Karl Hanneman, Charles Hansard, Igor Levental, Stephen Orr John Ellis, Marc Faber, Wayne Kirk, William Natbony, Michael S. Parrett,and David Peat and Diana Walters.Peat.
Initially, our Our Board of Directors will consist of a single class of directors each serving one year terms. Once Electrum no longer beneficially owns more than 50% of our outstanding shares of common stock, our Board of Directorsand directors will be divided into three classes of directors, with each class as nearly equal in number as possible, serving staggered three year termsserve until a successor is duly elected and qualified or until a director's earlier death, removal or resignation. (other than directors that may be elected by holders of our preferred shares, if any). Following this offering and assuming no exercise by the underwriters of their over-allotment option, Electrum willis expected to hold % of our outstanding shares of common stock, and Liberty Metals & Mining willMERS is expected to hold % of our outstanding common stock. Electrum and Liberty Metals & MiningMERS will have certain director nomination rights pursuant to a stockholdersshareholders agreement that we intend to enter into in connection with this offering, and Electrum will otherwise have control over the outcome of director elections due to its holding of % of our outstanding shares of common stock following this offering. See “Certain"Certain Relationships and Related Party Transactions—StockholdersShareholders Agreement.”"
We have determined that each of , , , , ,Janice Stairs, Igor Gonzales, Karl Hanneman, Charles Hansard, Igor Levental and will beDavid Peat is an independent director within the meaning of the applicable rules of the SEC and the NYSE and that each of ,Janice Stairs, Charles Hansard and David Peat is also an independent director under Rule 10A-3 under the Exchange Act for the purpose of Audit Committee membership. In addition, our board has determined that David Peat is a financial expert within the meaning of the applicable rules of the SEC and the NYSE.
Mr. Orr has notified the Board of Directors that he intends to retire as Chief Executive Officer within one to two years following the completion of this offering. Accordingly, the Board of Directors has initiated efforts to recruit an experienced executive as President, who will work closely with Mr. Orr and be considered to succeed Mr. Orr as Chief Executive Officer. We intend for Mr. Orr to continue to serve on our Board of Directors after his retirement as Chief Executive Officer.
Board of Directors
We have not adopted a formal policy with respect to the identification and nomination of women and of other diverse attributes on the Board of Directors. Establishing and implementing a policy regarding diversity and female representation on the Board of Directors will be an element that we will take into consideration going forward.
There is currently one woman on the Board of Directors (representing 11% of the current directors) and the Board of Directors is committed to increasing the level of women on the Board of Directors as board turnover occurs from time to time, taking into account the skills, background, experience and knowledge desired at a particular time by the Board of Directors and its committees. Accordingly, consideration of the number of women who are directors, along with consideration of whether other diverse attributes are sufficiently represented on the Board of Directors, will be an important component of the selection process for new members of the Board of Directors going forward.
The Compensation and Nominating Committee will, within the purview of its mandate, have the responsibility to take diversity into consideration as part of the overall director selection and nomination processes and to make the identification of female candidates a search criterion. Gender diversity on the Board of Directors will be achieved by continuously monitoring the level of female representation and, where appropriate, recruiting qualified female candidates to fill positions, as the need arises, through vacancies, growth or otherwise.
The Board of Directors has not adopted a target regarding the number of women on the Board of Directors as the Board of Directors has determined that a target would not be the most effective way of ensuring greater diversity. The Board of Directors will however consider the appropriateness of adopting such a target in the future.
Executive Officer Positions
In appointing individuals to executive officer positions, we weigh a number of factors, including skills, experience and personal attributes required for the position along with the level of female representation within our senior management team. There are currently no women occupying an executive officer position within the Company (0% of the executive officers). We are, however, committed to increasing the gender diversity of our executive officers going forward.
We have not adopted a target for the number of women in executive officer positions. The Board of Directors believes the most effective way to achieve greater diversity in our senior management team is to identify high-potential women within the organization and work with them to ensure they develop the skills, acquire the experience and have the opportunities necessary to eventually occupy executive officer positions. This includes taking action to build a culture of inclusion throughout the organization. The Board of Directors will, however, continue to evaluate the appropriateness of adopting targets in the future.
The Executive Committee will consist of Stephen OrrJanice Stairs (chair), William NatbonyIgor Levental and Diana Walters.Stephen Orr. The Executive Committee will operate pursuant to a charter approved by the Board of Directors. The Executive Committee has and may exercise all of the powers and authority of the Board of Directors, subject to such limitations as the Board of Directors and/or applicable law may from time to time impose.
The Audit Committee will consist of David Peat (chair), Wayne KirkCharles Hansard and Michael Parrett,Janice Stairs, and will be comprised entirely of independent directors. The Audit Committee will operate pursuant to a charter approved by the Board of Directors. The Audit Committee will approve the engagement of our independent public auditor and the scope of the audit to be undertaken by such auditor. In connection with our Annual Report on Form 10-K, the Audit Committee shall also review with management and the independent auditor the financial information to be included therein. In addition, the Audit Committee will review all proposed related person transactions for the purpose of recommending to the disinterested members of the Board of Directors that the transaction should be ratified and approved. See “Certain"Certain Relationships and Related Party Transactions.”"
The Compensation and Nominating Committee will consist of Wayne KirkKarl Hanneman (chair), Marc FaberIgor Levental and David Peat, and will be comprised entirely of independent directors. The Compensation and Nominating Committee will operate pursuant to a charter approved by the Board of Directors. The Compensation and Nominating Committee will determinerecommend and approveadvise the levelindependent directors of the Board of Directors with respect to the compensation for the Chief Executive Officer and Chairman.Officer. The Compensation and Nominating Committee will also recommend and advise the Board of Directors with respect to the compensation of directors and other executive officers. The Compensation and Nominating Committee will make recommendations to the Board of Directors regarding the establishment and terms of our employee equity-based incentive plans and will administer such plans. The Compensation and Nominating Committee will identify and nominate members for election to the Board of Directors and develop and recommend to the Board of Directors corporate governance principles applicable to us. The Compensation and Nominating Committee will also oversee the annual evaluation of the Board of Directors’Directors' performance.
The Technical, Environmental, Health and Safety Committee will consist of John EllisIgor Gonzales (chair), Michael ParrettKarl Hanneman and Stephen Orr. The Technical, Environmental, Health and Safety Committee will operate pursuant to a charter approved by the Board of Directors. The Technical, Environmental, Health and Safety Committee will be responsible for the review of our technical, environmental, health and safety performance, of the Company, and mineralized material,mineral resources, resource and reserve reporting.
The Finance Committee will consist of William NatbonyDavid Peat (chair), Marc FaberAli Erfan and Diana Walters.Igor Levental. The Finance Committee will operate pursuant to a charter approved by the Board of Directors. The Finance Committee will be responsible for assisting the Board of Directors in its oversight of theour major investments and financial risk management programs, policies and processesprocesses.
We have been billed an aggregate amount of $450,000 and $88,000 in fees by our external auditors over the fiscal years ended December 31, 2019 and 2018, respectively, for audit services.
There were no audit related fees by our external auditors for the fiscal years ended December 31, 2019 and 2018.
We have been billed an aggregate amount of $78,000 and $92,000 in fees by our external auditors over the fiscal years ended December 31, 2019 and 2018, respectively, for professional services rendered relating to tax compliance, tax advice and tax planning. Such services included corporate income tax return preparation and consultation on foreign tax matters.
We have not been billed any other fees by our external auditors for the fiscal years ended December 31, 2019 and 2018.
Compensation Committee Interlocks and Insider Participation
None of our executive officers serves, or in the past year has served, as a member of the Company.board of directors or compensation committee (or other committee performing equivalent functions) of any entity that has one or more executive officers serving on our board of directors or compensation committee. No interlocking relationship exists between any member of the compensation committee (or other committee performing equivalent functions) and any executive, member of the board of directors or member of the compensation committee (or other committee performing equivalent functions) of any other company.
Prior to the closing of this offering, our Board of Directors will adopt an insider trading policy that will, subject to certain exceptions, prohibit our employees, directors and officers from trading in our securities while in possession of material nonpublic information.
Code of Business Conduct and Ethics
Prior to the closing of this offering, our Board of Directors will adopt a code of business conduct and ethics applicable to our employees, directors and officers, in accordance with applicable U.S. federal securities laws and the corporate governance rulesrequirements of the NYSE. Any waiver of this code to an employee may be granted only by the Chief Executive Officer or the Chief Financial Officer or General Counsel.Officer. Only the Board of Directors or a designated committee of the Board of Directors may provide waivers involving any of our directors or executive officers. All waivers granted to our directors and executive officers will be promptly disclosed as required by applicable U.S. federal securities laws and the corporate governance rulesrequirements of the NYSE.
None of our directors or executive officers, and to the best of our knowledge, no shareholder holding a sufficient number of securities to materially affect the control of the Company, has been subject to any penalties or sanctions imposed by a court relating to securities legislation or by a securities regulatory authority or has entered into a settlement agreement with a securities regulatory authority or been subject to any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable investor making an investment decision.
None of our directors or executive officers, and to the best of our knowledge, no shareholder holding a sufficient number of securities to materially affect the control of the Company, has, within the 10 years prior to the date of this prospectus, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold the assets of that individual.
Corporate Cease Trade Orders and Bankruptcies
None of our directors or executive officers, and to the best of our knowledge, no shareholder holding a sufficient number of securities to materially affect the control of the Company is, as at the date of this prospectus, or has been within the 10 years before the date of this prospectus: (a) a director, chief executive officer or chief financial officer of any company that was subject to an order that was issued while the director or executive officer was acting in the capacity as director, chief executive officer or chief financial officer; (b) was subject to an order that was issued after the director or executive officer ceased to be a director, chief executive officer or chief financial officer and which resulted from an event that occurred while that person was acting in the capacity as director, chief executive officer or chief financial officer; or (c) a director or executive officer of any company that, while that person was acting in that capacity, or within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets. For the purposes of this paragraph, "order" means a cease trade order, an order similar to a cease trade order or an order that denied the relevant company access to any exemption under securities legislation, in each case, that was in effect for a period of more than 30 consecutive days.
EXECUTIVE AND DIRECTOR COMPENSATION
Our named executive officers or NEOs,("NEOs"), which consist of our principal executive officer and the two other most highly compensated executive officers, are:
The information in this section does not give effect to the Reorganization.
Roger P. Johnson, our Chief Financial Officer
John Galassini, our Chief Operating Officer
The table below summarizes the total compensation paid to or earned by each NEO in 2012.fiscal years ending 2019.
2012
2019 Summary Compensation Table
Name and Principal Position(a) | Year(b) | Salary ($) (c) | Bonus ($) (d) | Option Awards ($) (f) | Non-Equity Incentive Plan Compensation ($) (g) (1) | All Other Compensation ($) (i) | Total ($) (j) | |||||||||||||||||||||
Stephen Orr Executive Chairman and Chief Executive Officer | 2012 | 500,000 | — | 3,386,082 | (2) | — | — | 3,886,082 | ||||||||||||||||||||
| 2011 | 332,877 | — | 1,122,500 | (3) | 297,000 | 50,000 | (5) | 1,802,377 | ||||||||||||||||||||
Roger P. Johnson Chief Financial Officer | 2012 | 330,000 | 675,358 | (2) | — | 17,000 | (6) | 1,022,358 | ||||||||||||||||||||
| 2011 | 270,600 | 600,000 | (4) | 392,300 | (3) | 242,000 | 13,200 | (6) | 1,518,100 | |||||||||||||||||||
John Galassini Chief Operating Officer | 2012 | 350,000 | — | 674,705 | (2) | — | 17,000 | (6) | 1,041,705 | |||||||||||||||||||
| 2011 | 140,000 | — | 1,779,000 | (3) | 131,000 | 3,403 | (6) | 2,053,403 | ||||||||||||||||||||
Name and Principal Position | Year | Salary ($) | Non-Equity Incentive Plan Compensation ($)(1) | Option Awards ($)(2) | All Other Compensation ($)(3) | Total ($) | |||||||||||||
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Stephen Orr | 2019 | 521,000 | 425,000 | 931,000 | — | 1,877,000 | |||||||||||||
Chief Executive Officer | |||||||||||||||||||
Philip Pyle | 2019 | 350,000 | 197,000 | 580,000 | 19,000 | 1,146,000 | |||||||||||||
Vice President of Exploration & Chief Geologist | |||||||||||||||||||
John Kinyon | 2019 | 350,000 | 175,000 | 580,000 | 15,500 | 1,120,500 | |||||||||||||
Executive Vice President of Operations | |||||||||||||||||||
Executive Employment Agreements with Named Executive Officers
Employment Agreement with Mr. Orr
We entered into an employment agreement with Mr. Orr, dated as of May 3, 2011. He commenced employment as our Executive Chairman effective as of May 4, 2011 and has been our Chief Executive Officer since June 2011.
Base SalarySalary.. Effective January 1, 2020, Mr. Orr receives an annual base salary of $500,000,$619,000, which will be subject to review on an annual basis and may be adjusted in accordance with the procedures set forth by the Compensation and Nominating Committee.
Stock Options Annual Bonus.. Upon commencement Mr. Orr is eligible to participate in a bonus plan pursuant to which his current target bonus is 100% of his employment with us,base salary upon achievement by him and the Company of certain targets determined by the Compensation and Nominating Committee. The amount of bonus attainment may range 0% to 100% of base salary in any given year as determined by the Compensation and Nominating Committee, and the amount of annual bonus actually paid (if any) will depend on the
actual performance of the Company and Mr. Orr was granted an option to purchase 125,000 shares of our common stock. On May 1, 2012,as determined by the Compensation and Nominating Committee.
Stock Options. Mr. Orr was granted an optioncontinues to purchase an additional 125,000 shares ofbe eligible to receive equity awards under our common stock. These options have been cancelled, and new option grants have been made.compensation programs. See “—"—Stock Option Grants.”"
Benefits and PerquisitesPerquisites.. Mr. Orr will beis entitled to participate in the various employee benefits plans that are, from time to time, made generally available to our employees.
Confidentiality and Non-SolicitationNon-Solicitation.. Mr. Orr has agreed to maintain the confidentiality of our information and not to use or allow or help another to use or access such information at any time during or after his employment with us. Mr. Orr has also agreed not to solicit any of our employees, consultants or service providers during his employment and for one year after termination of his employment.
Termination and Change in ControlControl.. Payments and benefits to which Mr. Orr will be entitled upon termination of his employment, whether or not in connection with a change in control, are discussed below under “—"—Potential Payments Upon Termination or Change in Control.”"
Employment Agreement with Mr. JohnsonPyle
We entered into an employment agreement with Mr. Johnson,Pyle, dated as of February 28,June 1, 2011, and he commenced employment as our Chief Financial OfficerVice President of Exploration effective as of March 9,June 1, 2011.
Base SalarySalary.. Effective January 1, 2020, Mr. JohnsonPyle receives an annual base salary of $330,000,$370,000, which will be subject to review on an annual basis and may be adjusted in accordance with the procedures set forth by the Compensation and Nominating Committee.
One-Time Bonus Annual Bonus.. Upon commencement of his employment with us, Mr. Johnson received a one-time bonus of $600,000 as compensation for forgoing his stock options from his prior employer.
Annual Bonus. Mr. Johnson will bePyle is eligible to participate in a bonus plan pursuant to which he will be entitled to receive an annualhis current target bonus equal to 67% (decreased to 50% as of April 1, 2012)is 70% of his base salary upon achievement by him and the Company of certain targets determined by the Compensation and Nominating Committee. The amount of target bonus attainment may range from 33% of base salary0% to 100% of base salary in any given year as determined by the Compensation and Nominating Committee, and the amount of annual bonus actually paid (if any) will depend on the actual performance of the Company and Mr. JohnsonPyle as determined by the Compensation and Nominating Committee.
Stock OptionsOptions.. Upon commencement of his employment with us, Mr. Johnson was granted an initial optionPyle is eligible to purchase 35,000 shares ofreceive equity awards under our common stock and a regular option to purchase 3,600 shares of our common stock. These options have been cancelled, and new option grants have been made.compensation programs. See “—"—Stock Option Grants.”"
Benefits and PerquisitesPerquisites.. Mr. Johnson will bePyle is entitled to participate in the various employee benefits plans that are, from time to time, made generally available to our employees.
Confidentiality and Non-SolicitationNon-Solicitation.. Mr. JohnsonPyle has agreed to maintain the confidentiality of our information and not to use or allow or help another to use or access such information at any time during or after his employment with us. Mr. JohnsonPyle has also agreed not to solicit any of our employees, consultants or service providers during his employment and for one year after termination of his employment.
Termination and Change in ControlControl.. Payments and benefits to which Mr. JohnsonPyle will be entitled upon termination of his employment, whether or not in connection with a change in control, are discussed below under “—"—Potential Payments Upon Termination or Change in Control.”"
Employment Agreement with Mr. GalassiniKinyon
We entered into an employment agreement with Mr. Galassini,Kinyon, dated as of July 7, 2011, andApril 1, 2016, pursuant to which he commenced employment in his role as our Chief Operating Officer effectiveExecutive Vice President of Operations as of August 8, 2011.April 1, 2016.
Base SalarySalary.. Effective January 1, 2020, Mr. GalassiniKinyon receives an annual base salary of $350,000,$370,000, which will be subject to review on an annual basis and may be adjusted in accordance with the procedures set forth by the Compensation and Nominating Committee.
Annual BonusBonus.. Mr. Galassini will beKinyon is eligible to participate in a bonus plan pursuant to which at the end of 2011, he will be entitled to receive an annualhis current target bonus in the amount of 50% of his base salary and up to 100%is 70% of his base salary upon achievement by him and the Company of certain targets determined by the Compensation and Nominating Committee. The amount of bonus attainment may range 0% to 100% of base salary in any given year as determined by the Compensation and Nominating Committee, and the amount of annual bonus actually paid (if any) will depend on the actual performance of the Company and Mr. GalassiniKinyon as determined by the Compensation and Nominating Committee.
Stock OptionsOptions.. Upon commencement of his employment with us, Mr. Galassini was granted an optionKinyon is eligible to receive options to purchase 150,000 shares of our common stock. These options have been cancelled, and new option grants have been made.stock under our compensation programs. See “—"—Stock Option Grants.”"
Benefits and PerquisitesPerquisites.. Mr. Galassini will beKinyon is entitled to participate in the various employee benefits plans that are, from time to time, made generally available to our employees.
Confidentiality and Non-SolicitationNon-Solicitation.. Mr. GalassiniKinyon has agreed to maintain the confidentiality of our information and not to use or allow or help another to use or access such information at any time during or after his employment with us. Mr. GalassiniKinyon has also agreed not to solicit any of our employees, consultants or service providers during his employment and for one year after termination of his employment.
Termination and Change in ControlControl.. Payments and benefits to which Mr. GalassiniKinyon will be entitled upon termination of his employment, whether or not in connection with a change in control, are discussed below under “—"—Potential Payments Upon Termination or Change in Control.”"
2012 Annual BonusStock Option Grants
Under the terms of their employment agreements, the NEOs are eligible to receive an On May 3, 2019, we granted annual bonus with a target amount of 50% of their base salary and a maximum payout of 100% of their base salary, depending on the achievement of certain performance metrics set by the Compensation and Nominating Committee.
For the 2012 annual bonus, the Compensation and Nominating Committee has set performance metrics for each of our executive officers in the following categories: capital management, project development, exploration and resource management, asset management, safety and environmental. The performance metrics were reasonably challenging and represented a general set of goals for the Company,stock option awards in recognition of the fact that all members of the senior management are part of a team of which each member can contribute toward achieving those goals. The standards and relative weightings of the metrics differed among members of senior managementservices performed in fiscal year 2019 to reflect the different responsibilities carried by each executive.
Each performance metric was assigned a weight, and to the extent practicable, all metrics were measured by objective standards. Following the end of the 2012 performance year, the Compensation and Nominating Committee assessed the achievement of each metric, which achievement ranged from 90% to 200%. For each
metric, an achievement below 90% resulted in a zero payout with respect to that metric and a 100% achievement resulted in a target payout with respect to that metric. If all standards in a metric were not only achieved but substantially exceeded, then the Compensation and Nominating Committee may, in its discretion, recommend an achievement for that metric that exceeds 100% (to up to 200%), in which case the payout with respect to that metric would exceed target. Two performance metrics were removed from the calculation due to changing priorities during the 2012 performance year, and three new performance metrics in the categories involving comprehensive resource modeling, mine plan acceleration and production improvement, and discovery of new zones of mineralization were added to reflect significant efforts devoted to, and achievement in, these areas during the 2012 performance year. A deduction was also made in the total achievement score as a result of the mine fire that occurred in February 2012.
On February 22, 2013, the Board approved the total achievement score and resulting payout determined from the assessment made by the Compensation and Nominating Committee described above, subject to an adjustment in the total achievement scores of Messrs. Orr and Johnson pending the result of a strategic objective that is targeted for completion in 2013 and any other adjustment in the payout to each NEO to be determined by the Board.
The final payout to each NEO will be in the form of Deferred Stock Units. Currently, we expect each NEO to receive Deferred Stock Units for his 2012 bonus in the following amounts:
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Stock Option Grants
On October 30, 2012, the Board approved the grant of 1,380,250 options to ourkey employees, including the NEOs, in exchange for the cancellation of all outstanding options previously granted by us. This first portion of the new options was granted on October 30, 2012, with an exercise price of $13.83, which is no less than the fair market value of our common stock on October 30, 2012. On February 16, 2013, the Board approved the grant of 1,412,750 options to our employees, including the NEOs. This second portion of the new options was granted on February 16, 2013, with an exercise price of $13.83, which is no less than the fair value of our common stock on February 16, 2013.
The number of shares of our common stock and vesting schedule underlying these options granted to our NEOs are detailed in the October 30, 2012following table. These stock option awards granted to the NEOs are as follows:vest ratably on December 14, 2018, December 14, 2019, December 14, 2020, December 14, 2021 and December 14, 2022. These stock option awards each have an exercise price of $6.00 per share.
NEO | Option Shares | |||||||
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Stephen Orr | ||||||||
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John | ||||||||
The number of shares of our common stock and vesting schedule underlying the February 16, 2013 option awards granted to the NEOs are as follows:
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2019 Fiscal Year-End Outstanding Equity Awards at Fiscal Year-End
The table below provides information on the holdings of equity awards (which are comprised of only stock options) held by the NEOs as of December 31, 2012.2019.
2012
Outstanding Equity Awards at 2019 Fiscal Year-End Option Awards
| Option Awards(5) | ||||||||||||||||
Name (a) | Number of Securities Underlying Unexercised Options Exercisable (#) (b) | Number of Securities Underlying Unexercised Options Unexercisable (#) (c) | Option Exercise Price ($) (e) | Option Expiration Date (f) | ||||||||||||
Stephen Orr | 112,500 | 337,500 | (1) | 13.83 | 10/30/2022 | |||||||||||
| 37,500 | 112,500 | (2) | 13.83 | 10/30/2022 | ||||||||||||
Roger P. Johnson | 27,188 | 81,562 | (1) | 13.83 | 10/30/2022 | |||||||||||
| 7,500 | 22,500 | (2) | 13.83 | 10/30/2022 | ||||||||||||
John Galassini | 43,125 | 129,375 | (1) | 13.83 | 10/30/2022 | |||||||||||
| 11,250 | 33,750 | (2) | 13.83 | 10/30/2022 | ||||||||||||
Name | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable | Option Exercise Price ($) | Option Expiration Date | |||||||
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Stephen Orr | 600,000 | — | 13.83 | 10/30/2022 | |||||||
| 600,000 | — | 13.83 | 2/16/2023 | ||||||||
| 290,000 | — | 3.50 | 2/8/2025 | ||||||||
| 228,873 | — | 3.50 | 12/23/2025 | ||||||||
| 187,500 | 62,500 | (1) | 4.50 | 12/15/2026 | |||||||
| 126,000 | 126,000 | (2) | 4.50 | 12/5/2027 | |||||||
| 63,000 | 189,000 | (3) | 6.00 | 12/13/2028 | |||||||
Philip Pyle | 102,000 | — | 13.83 | 10/30/2022 | |||||||
| 102,000 | — | 13.83 | 2/16/2023 | ||||||||
| 110,000 | — | 3.50 | 2/8/2025 | ||||||||
| 116,667 | — | 3.50 | 12/23/2025 | ||||||||
| 116,250 | 38,750 | (1) | 4.50 | 12/15/2026 | |||||||
| 78,500 | 78,500 | (2) | 4.50 | 12/5/2027 | |||||||
| 39,250 | 117,750 | (3) | 6.00 | 12/13/2028 | |||||||
John Kinyon | 45,000 | — | 13.83 | 10/30/2022 | |||||||
| 45,000 | — | 13.83 | 2/16/2023 | ||||||||
| 80,000 | — | 3.50 | 2/8/2025 | ||||||||
| 63,137 | — | 3.50 | 12/23/2025 | ||||||||
| 26,250 | 8,750 | (4) | 3.50 | 3/18/2026 | |||||||
| 67,875 | 22,625 | (1) | 4.50 | 12/15/2026 | |||||||
| 78,500 | 78,500 | (2) | 4.50 | 12/5/2027 | |||||||
| 39,250 | 117,750 | (3) | 6.00 | 12/13/2028 | |||||||
Potential Payments Upon Termination or Change in Control
Below we describe the payments and benefits to which each NEO will be entitled to under his employment agreement if his employment is terminated (i) by him without good reason, (ii) by us for cause, (iii) by us without cause"cause" or by him for good reason"good reason" (without a change"change in control)control"), (iv)(ii) by us without cause or by him for good reason within one year of a change in control or (v)(iii) due to his death or disability."disability" (such terms as defined in the applicable employment agreement).
Mr. Orr
Voluntary Resignation Without Good Reason. If Mr. Orr voluntarily terminates his employment without good reason, he will not be entitled to any payments or benefits. Any unvested stock options will cease vesting, and any vested stock options will remain exercisable until the earlier of (i) the date 30 days following termination and (ii) the expiration of the original option term.
Termination for Cause. If we terminate Mr. Orr’s employment for cause, he will not be entitled to any payments or benefits. Any outstanding stock options will cease to be exercisable and will be forfeited.
Termination without Cause or for Good ReasonReason.. If we terminate Mr. Orr’sOrr's employment without cause or Mr. Orr voluntarily terminates his employment for good reason, he will be entitled to: (i) 12 months of base salary, payable in lump sum, and (ii) if he timely elects continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”("COBRA"), payment by us on his behalf of the portion of COBRAthe monthly premiums for his group health insurance (including coverage of his dependents) that we paid immediately prior to his termination duringfor the 12 months following termination, at our expense.his termination. Any unvested stock options will cease vesting and be forfeited, and any vested stock options will remain exercisable until the earlier of (i) the date 180 days following termination and (ii) the expiration of the original option term.
Termination without Cause or for Good Reason in Connection with a Change in ControlControl.. If there is a change in control and (a) within one year offollowing the change in control we terminate Mr. Orr’sOrr's employment is terminated without cause or Mr. Orr voluntarily terminates his employment for good reason or (b) within three months preceding the change in control we terminate Mr. Orr's employment without cause and such termination occurred in anticipation of such change in control, he will be entitled to: (i) 24 months of base salary, payable in lump sum, and (ii) if he timely elects continuation coverage under COBRA, payment by us on his behalf of the portion of COBRAthe monthly premiums for his group health insurance (including coverage of his dependents) that we paid immediately prior to his termination, duringfor the 18 months following termination, at our expense.his termination. Any unvested stock options will cease vesting and be forfeited, and any vested stock options will remain exercisable until the earlier of (i) the date 180 days following termination and (ii) the expiration of the original option term.
Death or DisabilityDisability.. If Mr. Orr’sOrr's employment is terminated due to death or disability, he will not be entitled to any payments or benefits. Any unvested stock options will cease vesting,vest in full and any vested stock options will remain exercisable until the earlier of (i) the date one year following termination and (ii) the expiration of the original option term.
Mr. JohnsonPyle
Voluntary Resignation Without Good Reason. If Mr. Johnson voluntarily terminates his employment without good reason, he will not be entitled to any payments or benefits. Any unvested stock options will cease vesting, and any vested stock options will remain exercisable until the earlier of (i) the date 30 days following termination and (ii) the expiration of the original option term.
Termination for Cause. If we terminate Mr. Johnson’s employment for cause, he will not be entitled to any payments or benefits. Any outstanding stock options will cease to be exercisable and will be forfeited.
Termination without Cause or for Good ReasonReason.. If we terminate Mr. Johnson’sPyle's employment without cause or Mr. JohnsonPyle voluntarily terminates his employment for good reason, he will be entitled to: (i) 2012 months of base salary, payable in lump sum, (ii) a prorated annual bonus for the year of termination determined by multiplying the annual bonus that he otherwise would have been earned by a fraction, the numerator of which is the number of days that elapsed between January 1 of the year of termination and thehis termination date, and the denominator of which is 365 or a Pro(the "Pro Rata Annual Bonus,Bonus"), to be paid at the same time as such bonuses are paid to our other executives, and (iii) if he timely elects continuation coverage under COBRA, payment by us on his behalf of the portion of COBRAthe monthly premiums for his group health insurance (including coverage of his dependents) that we paid immediately prior to his termination, duringfor the 12 months following termination, at our expense.his termination. Any unvested stock options will cease vesting and be forfeited, and any vested stock options will remain exercisable until the earlier of (i) the date 180 days following termination and (ii) the expiration of the original option term.
Termination without Cause or for Good Reason in Connection with a Change in ControlControl.. If there is a change in control and (a) within one year offollowing the change in control Mr. Pyle's employment is terminated without cause or Mr. Pyle voluntarily terminates his employment for good reason or (b) within three months preceding the change in control we terminate Mr. Johnson’sPyle's employment without cause or Mr. Johnson voluntarily terminates his employment for good reason,and such termination occurred in anticipation of such change in control, he will be entitled to: (i) 24 months of base salary, (ii) a Pro Rata Annual Bonuspayable in lump sum, and (iii)(ii) if he timely elects continuation coverage under COBRA, payment by us on his behalf of the portion of COBRAthe monthly premiums for his group health insurance (including coverage of his dependents) that we paid immediately prior to his termination, duringfor the 18 months following termination, at our expense.his termination. Any unvested stock options will cease vesting
and be forfeited, and any vested stock options will remain exercisable until the earlier of (i) the date 180 days following termination and (ii) the expiration of the original option term.
Death or DisabilityDisability.. If Mr. Johnson’sPyle's employment is terminated due to death or disability, he will be entitled to his Pro Rata Annual Bonus.Bonus, to be paid at the same time as such bonuses are paid to our other executives. Any unvested stock options will cease vesting,vest in full and any vested stock options will remain exercisable until the earlier of (i) the date one year following termination and (ii) the expiration of the original option term.
Mr. GalassiniKinyon
Voluntary Resignation Without Good Reason. If Mr. Galassini voluntarily terminates his employment without good reason, he will not be entitled to any payments or benefits. Any unvested stock options will cease vesting, and any vested stock options will remain exercisable until the earlier of (i) the date 30 days following termination and (ii) the expiration of the original option term.
Termination for Cause. If we terminate Mr. Galassini’s employment for cause, he will not be entitled to any payments or benefits. Any outstanding stock options will cease to be exercisable and will be forfeited.
Termination without Cause or for Good ReasonReason.. If we terminate Mr. Galassini’sKinyon's employment without cause or Mr. GalassiniKinyon voluntarily terminates his employment for good reason, he will be entitled to: (i) 12 months of base salary, payable in lump sum, (ii) a Pro Rata Annual Bonus, to be paid at the same time as such bonuses are paid to our other executives, and (iii) if he timely elects continuation coverage under COBRA, payment by us on his behalf of the portion of COBRAthe monthly premiums for his group health insurance (including coverage of his dependents) that we paid immediately prior to his termination, duringfor the 12 months following termination, at our expense.his termination. Any unvested stock options will cease vesting and be forfeited, and any vested stock options will remain exercisable until the earlier of (i) the date 180 days following termination and (ii) the expiration of the original option term.
Termination without Cause or for Good Reason in Connection with a Change in ControlControl.. If there is a change in control and (a) within one year offollowing the change in control Mr. Kinyon's employment is terminated without cause or Mr. Kinyon voluntarily terminates his employment for good reason or (b) within three months preceding the change in control we terminate Mr. Galassini’sKinyon's employment without cause or Mr. Galassini voluntarily terminates his employment for good reason,and such termination occurred in anticipation of such change in control, he will be entitled to: (i) 24 months of base salary, (ii) a Pro Rata Annual Bonuspayable in lump sum, and (iii)(ii) if he timely elects continuation coverage under COBRA, payment by us on his behalf of the portion of COBRAthe monthly premiums for his group health insurance (including coverage of his dependents) that we paid immediately prior to his termination, duringfor the 18 months following termination, at our expense.his termination. Any unvested stock options will cease vesting and be forfeited, and any vested stock options will remain exercisable until the earlier of (i) the date 180 days following termination and (ii) the expiration of the original option term.
Death or DisabilityDisability.. If Mr. Galassini’sKinyon's employment is terminated due to death or disability, he will be entitled to his Pro Rata Annual Bonus.Bonus, to be paid at the same time as such bonuses are paid to our other executives. Any unvested stock options will cease vesting,vest in full and any vested stock options will remain exercisable until the earlier of (i) the date one year following termination and (ii) the expiration of the original option term.
Sunshine Silver Mines Corporation Long Term Incentive Plan
We have adopted the Sunshine Silver Mines Corporation Long Term Incentive Plan or the LTIP,("LTIP"), which allows us to grant an array of equity-based awards to our NEOs, other employees, consultants and non-employee directors. The purpose of the LTIP is to recognize the contributions made by our employees, consultants and directors, and to provide these individuals with an additional incentive to use maximum efforts for the future success of the Company. StockAll stock options granted to Messrs. Orr, JohnsonPyle and Galassini in 2012,Kinyon, as disclosed above, were granted under the LTIP.
Plan TermTerm.. The LTIP expires after ten years,in December 2021, unless prior to that date either the maximum number of shares available for issuance under the LTIP has been issued or our Board of Directors terminates the LTIP.
Authorized SharesShares.. Subject to adjustment as described below, 7,000,00012,000,000 shares of our common stock are available for awards to be granted under the LTIP. The number of shares that may be issued pursuant to stock options, stock appreciation rights and stock awards (i.e., awards in the form of shares of our common stock, including restricted stock, and share-settled
restricted stock units which may be issued in tandem)and DSUs) may not exceed 7,000,000, and the number
12,000,000. If a stock option or stock appreciation right expires or otherwise terminates without having been exercised in full, or if any shares subject to a stock award are forfeited, the shares for which thesuch stock option or stock appreciation right was not exercised or the shares so forfeited will again be available for issuance under the LTIP.
Administration Administration.. Our Board of Directors administers the LTIP and may also designate a committee composed of two or more non-employee directors to administer the LTIP. Any such committee so designated by our Board of Directors to administer the LTIP will comply with the legal requirements (if any) relating to the administration of the types of awards granted under the LTIP imposed by applicable corporate and securities laws, the Code and any stock exchange or national market system on which our common stock is then listed or traded. Our Board of Directors (or the designated committee) has authority to select individuals to whom awards are granted, determine the types of awards and terms and conditions of awards (including applicable vesting periods), and construe and interpret the LTIP and awards under it.
Types of AwardsAwards.. The LTIP provides for grants of stock options, stock appreciation rights, stock awards, cash awards, deferred stock unit awards and performance awards.
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Eligibility Eligibility.. Our employees, consultants and non-employee directors are eligible to receive awards under the LTIP, except that incentive stock options may only be granted to our employees.
Adjustments Adjustments.. In the event of any subdivision or consolidation of outstanding shares of our common stock, declaration of a dividend payable in shares of our common stock or other stock split, our Board of Directors (or the designated committee) will proportionately adjust the terms of any outstanding awards and the number of shares issuable under the LTIP. LTIP and the terms of any outstanding awards (including the number of shares covered by outstanding awards, the exercise price and the appropriate fair market value determination).
In the event of any other recapitalization or capital reorganization of the Company, any consolidation or merger of the Company with another corporation or entity, the adoption by the Company of any plan of exchange affecting our common stock or any distribution to holders of our common stock of securities or property (other than normal cash dividends or dividends payable in our common stock), our Board of Directors (or the designated committee) will proportionately adjust the terms of any outstanding awards and the number of shares issuable under the LTIP and the terms of any outstanding awards, but only to the extent necessary to maintain the proportionate interest of the award holders and preserve, without exceeding, the value of such awards. In addition, in the event of a corporate merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation, our Board of Directors (or the designated committee) may make such adjustments to awards or other provisions for the disposition of awards as it deems equitable, and will be authorized to provide for the substitution or assumption of awards, the acceleration of the vesting and exercisability of, or lapse of restrictions with respect to, awards, or the cash-out of awards.awards (with cancellation of any awards that are "out of the money"), or the cancellation of options and SARs with notice and opportunity to the holders thereof to exercise prior to such cancellation.
Termination of Service and Change in ControlControl.. Upon a participant’sparticipant's termination of service, any unexercised, unvested or unpaid awards will be treated as set forth in the applicable award agreement. In the event of a change in control where(i) with respect to stock options and stock appreciation rights, if the stock options or stock appreciation rights are not continued, assumed (or substituted)or substituted by the Company (or surviving corporation or ultimate parent corporation in a change in control), unless otherwise provided in an applicable award agreement, our Board of Directors (or the designated committee) may provide for full or partial vesting or cash-out of any outstandingsuch stock options or stock appreciation rights. Ourrights and (ii) with respect to stock awards, our Board of Directors (or the designated committee) may also provide in the applicable award agreement (or by unilateral amendment to the award agreement) the terms and conditions that relate to the lapse of any restrictions on shares subject to any stock awards in the event of a change in control.
Amendment and TerminationTermination.. Our Board of Directors (or the designated committee) has the right to amend any participant's award agreements issued to a participant,agreement, subject to the participant’sparticipant's consent if such amendment is not favorable to the participant. Our Board of Directors may amend, suspend or terminate the LTIP, but no such amendment or termination willmay be made which would adversely affect any outstanding awards without the written consent of the affected participants. In addition, to the extent necessary to comply with Section 422 of the Code, Section 16b-3 of the Exchange Act, Section 613(i) of the Toronto Stock Exchange Company Manual or any other applicable law or regulation, including the requirements of any stock exchange or national market system on which our common stock is then listed, the Company will obtain shareholder approval of any plan amendment or termination.
Sunshine Silver Mines Corporation Annual Incentive Plan
We have adopted the Sunshine Silver Mines Corporation Annual Incentive Plan ("AIP"), under which our NEOs and other employees are eligible to receive annual cash bonuses. The purpose of the plan is to incentivize our executives and other employees to attain annual performance objectives, thereby furthering our best interests and those of our shareholders.
Eligibility Eligibility.. Each of our employees is eligible to receive an annual cash bonus under the planAIP for each fiscal year. Each employee who is employed for less than a full fiscal year will be eligible for a pro rata bonus for such partial year. In addition to the year.Executive Officer Bonuses as described more fully below, for each fiscal year, the Compensation and Nominating Committee may approve a bonus pool from which bonuses to employees other than our executive officers may be paid, with such bonuses to be determined by the chief executive officer.
Executive Officer BonusesBonuses.. The Compensation and Nominating Committee may provide cash bonuses to our executive officers based on objective criteria established by the Compensation and Nominating Committee. For each fiscal year, the Compensation and Nominating Committee will:
AIP;
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Committee deems appropriate, including, without limitation, performance goals based on the performance measures enumerated in our LTIP and summarized above (see "—Long Term Incentive Plan"); and
Staff Bonuses. For each fiscal year, the Compensation and Nominating Committee will approve a bonus pool for employees who are not executive officers. The amount of the bonus pool will be based on the employees’ base salaries, specified target bonus percentages, specified key performance indicators, individual performance goals and/or any other objective criteria that the Compensation and Nominating Committee deems appropriate, including, without limitation, performance goals based on the performance measures enumerated in our LTIP and summarized above (see “—Sunshine Silver Mines Corporation Long Term Incentive Plan”). The aggregate amount of the employees’ bonuses for a fiscal year may not exceed the amount of the bonus pool approved by the Compensation and Nominating Committee for the year.
Maximum Annual BonusBonus.. The plan specifies that the maximum amount of annual cash bonus that can be paid under the plan to any eligible employee for a single fiscal year will not exceed $10 million.
Amendment and TerminationTermination.. The Compensation and Nominating Committee may amend or terminate the plan at any time.
Settlement of Bonus AwardsAwards.. The Compensation and Nominating Committee may, in its discretion, settle bonuses paid under the planAIP in the form of equity.equity under the LTIP.
Clawback. Any bonus paid under the AIP is subject to repayment in accordance with any of our policies relating to the recoupment of incentive compensation, as may be in effect from time to time or as required by federal law or regulation.
With respect to the fiscal year ended December 31, 2019, each of our NEOs was eligible for an annual cash bonus under the AIP. The Compensation and Nominating Committee approved seven performance milestones related to safety, cost management, project completion and governmental and community relations, which would be used to determine bonus payouts to the NEOs. The level of achievement of the performance milestones, as well as an individual performance adjustment factor, were used by the Compensation and Nominating Committee to determine the actual bonus payouts as a percentage of the target bonus.
Non-Qualified Deferred Compensation Plan for Senior Executives and Outside Directors
Effective January 1, 2019, we adopted the Deferred Compensation Plan for Senior Executives and Outside Directors (the "Deferred Compensation Plan"), under which (i) our senior executives are eligible to elect to defer receipt of any portion of cash compensation or equity compensation awards other than from the exercise of stock options and (ii) our non-employee directors are eligible to elect to defer receipt of any portion of annual retainers or meeting awards.
Participants in the Deferred Compensation Plan are entitled to receive distribution of his or her deferred compensation account in either (i) a single lump sum distribution of cash or shares of our stock or (ii) annual installments of cash or shares of our stock over a period of not more than five (5) years after the date payment commences. All distributions under the Deferred Compensation Plan shall be made or shall commence, as the case may be, on the earlier of (i) the date designated in a participant's deferral election form and (ii) the date that is six months and one day after the occurrence of (x) the participant's termination of active service as a senior executive or non-employee
director as applicable or (y) the date of the participant's death; provided, however, that if a participant is a "specified employee" within the meaning of Internal Revenue Code Section 409A ("409A"), payment of any benefits under the Deferred Compensation Plan shall not commence until six months following a participant's "separation from service" as such term is defined under 409A.
Pursuant to our director compensation policy, each Board memberdirector will receive an annual cash retainer of $35,000 for service on the Board service. Board membersof Directors. Directors will also receive $1,500 for each Board of Directors and committee meeting attended (whether in person or by telephone), provided that directors who must travel inter-continentally to attend a Board of Directors or committee meeting in person will receive an additional $2,500. DirectorsUpon becoming a public entity, directors who chair the Audit Committee and Compensation and Nominating Committee will each receive an additional annual retainer of $14,000 and directors who chair any other standing committee of the Board of Directors will each receive an additional annual retainer of $7,000.
All such compensation is currently paid in the form of immediately vested DSUs that settle upon the director's cessation of continuous service. Directors also receive annual grants of stock options. On May 3, 2019, we granted annual stock option awards with an aggregate value of $1,618,063 to our directors in recognition of services performed in fiscal year 2019.
Following our initial publicthis offering, we intendmay begin to implementpay a directors’portion of each director's compensation deferral planin cash. We may permit directors to defer all or a portion of such compensation under the Deferred Compensation Plan, under which our directors will be able to defer their annual cash retainers and receive such deferred retainers in cash or in shares of our common stock. The director compensation policy as described above does not apply to Stephen Orr, our Executive ChairmanBeginning at the annual meeting of shareholders in 2021 and Chief Executive Officer, whose compensation is set forth above in this “Executive and Director Compensation.”
In addition, on October 30, 2012,at each annual meeting of shareholders thereafter, each director was approved to receive (i) aswill be granted an initial grant, an option under the LTIP to purchase a number of shares of our common stock with a Black-Scholes value of $100,000, (ii) for services performed prior to the 2012 annual meeting of stockholders, an option to purchase a number of shares of our common stock with a Black-Scholes value of $100,000 and (iii) for services performed during the period from October 30, 2012 until the 2013 annual meeting of stockholders, an option to purchase a number of shares of our common stock with a Black-Scholes value of $100,000 multiplied by a fraction, the numerator of which will be the number of months from October 30, 2012 to the date of our next scheduled annual meeting of stockholders in 2013 and the denominator of which will be 12.vest ratably on a monthly basis over 12 months. The first portion of these options was granted on October 30, 2012, with an exercise price of $13.83, which is no less than the fair market value of our common stock on October 30, 2012. The second portion of these options was granted on February 16, 2013, with an exercise price of $13.83, which is no less than the fair market value of our common stock on February 16, 2013.
The number of shares of our common stock and vesting schedule underlying the October 30, 2012 option awards granted to the directors are as follows:
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The number of shares of our common stock and vesting schedule underlying the February 16, 2013 option awards granted to the directors are as follows (Mr. Quartermann did not receive any option award in 2013 due to his retirement from the Board in December 2012):
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Beginning at the annual meeting of stockholders in 2013 and at each annual meeting of shareholders thereafter, each director will be granted an option to purchase a number of shares of our common stock with a Black-Scholes value of $100,000. The exerciseper share of such option will be the fair market value of our common stock on the date of grant.
2012 The director compensation policies described above do not apply to our employee directors, including Stephen Orr (whose compensation is set forth above in this "Executive and Director Compensation").
The table below provides information on the director compensation earned in 2019:
Name(1) | Stock Awards ($)(2)(3) | Option Awards ($)(4) | Total ($) | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
Janice Stairs | 8,750 | — | 8,750 | |||||||
Jeb Burns(5) | 42,500 | 114,520 | 157,020 | |||||||
Ali Erfan | 26,333 | — | 26,333 | |||||||
Karl Hanneman | 39,500 | 114,520 | 154,020 | |||||||
Wayne Kirk(6) | 44,000 | 114,520 | 158,520 | |||||||
Igor Levental | 30,750 | — | 30,750 | |||||||
David Peat | 44,000 | 114,520 | 158,520 | |||||||
Name (a) (1) | Fees Earned or Paid in Cash ($) (b) | Option Awards ($) (d)(2) | Total ($) (h) | |||||||||
John Ellis | 45,500 | 96,409 | 141,909 | |||||||||
Marc Faber | 51,000 | 96,409 | 147,409 | |||||||||
Wayne Kirk | 57,500 | 96,409 | 153,909 | |||||||||
William Natbony | 44,000 | 96,409 | 140,409 | |||||||||
Michael S. Parrett | 53,000 | 96,409 | 149,409 | |||||||||
David Peat | 51,500 | 96,409 | 147,909 | |||||||||
Robert A. Quartermain(3) | 51,500 | 96,409 | 147,909 | |||||||||
Diana Walters | 44,000 | 96,409 | 140,409 | |||||||||
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The following is a description of the transactions we have engaged in since January 1, 20082017 or currently proposed with our directors and executive officers and beneficial owners of more than five percent of our voting securities and their affiliates.
Formation and Merger
On February 22, 2011, Los Gatos Ltd. entered into an Agreement and Plan of Merger and Amalgamation, or the Merger Plan, with Sunshine Silver. Both entities were indirectly majority-owned by trusts primarily for the benefit of members of the immediate family of Dr. Kaplan. Pursuantaffiliates (in addition to the Merger Plan, Los Gatos Ltd. mergedemployment agreements, equity awards and was amalgamated withother compensation-related arrangements described in "Executive and into Sunshine Silver and the separate corporate existence of Los Gatos Ltd. ceased. Each outstanding preferred share and each issued and outstanding ordinary share of Los Gatos Ltd. was converted into approximately 0.15517 shares of our common stock. In addition, as a result of the Merger Plan, existing outstanding options to purchase one share of Los Gatos Ltd. ordinary shares were converted into an option to purchase approximately 0.15517 shares of our common stock at an exercise price of $2.32 per share.
Capital Contributions and Equity Financings
During the period from October 2, 2009 through December 31, 2009, individuals associated with various related entities purchased 11,425,956 ordinary shares of Los Gatos Ltd. at a price of $0.01 per share (including Philip Pyle, our Vice President Exploration, who purchased 603,015 ordinary shares and Mr. Natbony, our Director who purchased 3,180,879 ordinary shares)Compensation"). In addition, Los Gatos Ltd. issued 12,000,000 shares to related individualsThe information in payment for services. In June 2011, in consideration for Mr. Pyle accepting employment with Sunshine Silver, we amended his share purchase agreement so that the shares subject to a repurchase option may, in the event of his termination, be repurchased at the option of CGT Management Ltd., or CGT, for 100% of their fair market value.
In July 2011, certain employees and consultants of Tigris Financial Group, Ltd., or Tigris Ltd., a stockholder of the Company, and Electrum Ltd., an affiliate of the Company, agreed to enter into lock-up agreements restricting their ability to sell shares for a period of 180 days following the Company’s initial public offering. In consideration for the entry into such lock-up agreements, we agreed to amend share purchase agreements and share award agreements between the Company, Tigris Financial (International) L.P., or Tigris L.P., and such employees and consultants. The effectiveness of such amendments was subjectthis section does not give effect to the commencement of the 180-day lock-up period prior to June 30, 2012, the termination date of the lock-up agreements, and therefore such amendments did not become effective.Reorganization.
In the past, Los Gatos Ltd. maintained loan agreements and advances with CGT, one of our stockholders, and GRAT Holdings LLC (the parent of a current shareholder). See footnote 8 to our audited and unaudited consolidated financial statements. During 2009, Los Gatos Ltd. issued 1,383,682 ordinary shares and 53,901,115 preferred shares to CGT in satisfaction of $553,000 of such indebtedness. During 2009, Los Gatos Ltd. also settled $527,000 due to CGT through the issuance of 52,715,203 preferred shares. During 2010, Los Gatos Ltd. reduced related-party debt to CGT by $5.4 million as consideration for the exercise of 14,934,227 options in lieu of the stated exercise price of such options. InServices Agreements
Effective January 2011, the $31.2 million principal and accrued interest outstanding under these loan arrangements was exchanged for 14,542,512 preferred shares of Los Gatos Ltd. and the obligations were cancelled.
Effective as of May 11, 2010, the two members of the parent of Electrum Silver Holdings LLC (one of our former stockholders that transferred its shares to Electrum Silver US LLC), who at the time were direct members of Precious Metals Opportunities LLC, transferred 2% each of their respective interests in Precious Metals Opportunities LLC (totaling 4%) to Tigris Ltd., one of our existing stockholders.
During the years ended December 31, 2011 and 2010, the members of Precious Metals Opportunities LLC, which included the members of the parent of Electrum Silver Holdings LLC (one of our former stockholders that
transferred its shares to Electrum Silver US LLC) and Tigris Ltd., contributed $1.0 million and $36.0 million, over the respective time periods, as capital contributions to Precious Metals Opportunities LLC. On February 2, 2011, these capital contributions were converted into an aggregate of 20,000,000 shares of our common stock when Precious Metals Opportunities LLC converted to a Delaware corporation and became Sunshine Silver.
On March 8, 2011, we sold 8,318,264 shares of our common stock at a price of $13.825 per share for a total consideration of $115.0 million to Liberty Metals & Mining (pricing terms were agreed upon in December 2010). In connection with this sale, we entered into a stockholders agreement with certain of our stockholders, which provides certain rights to such holders of our stock, including a preemptive right in favor of Liberty Metals & Mining. The preemptive right does not apply to this offering. In accordance with its terms, the stockholders agreement, including Liberty Metals & Mining’s preemptive right, will terminate1, 2015, in connection with the closing of this offering. On June 1, 2011, Liberty Metals & Mining exercised its preemptive right pursuant to the stockholders agreement, purchasing an additional 527,313 shares of our common stock for total consideration of $7.3 million. Upon the purchase, Liberty Metals & Mining owned 15% of our outstanding common stock.
Between April and May 2011, we sold a total of 95,000 shares of our common stock at a price per share of $13.825 to Ozorrus Investments Limited, an entity affiliated with Stephen Orr, our Executive Chairman and Chief Executive Officer. In connection with the sales, we and the Electrum parties entered into a letter agreement and a subscription agreement with each of the stockholders. The agreements provide the stockholder with certain rights and restrictions with respect to the shares, and certain of the terms of the agreements will terminate in connection with the closing of this offering.
On May 2, 2011, certain of our existing Electrum stockholders sold a total of 37,257 shares of our common stock at a price per share of $13.825 to certain key employees of Tigris Ltd. and Electrum party affiliates, including to our current Director Mr. Natbony. In connection with the stock transfers, the transferees entered into letter agreements with us and the Electrum parties which contain certain rights and restrictions with respect to the shares. Certain of the terms of the letter agreements will terminate in connection with the closing of this offering.
Services Agreements
Effective January 1, 2008, Los Gatos Ltd. entered into a services agreement with Tigris L.P., one of our stockholders. The agreement was not negotiated on an arm’s-length basis and was entered into prior to us adopting our related party transaction policy. Pursuant to the agreement, Tigris L.P. agreed to provide Los Gatos Ltd. assistance with services, consisting primarily of business and financial advice with respect to the strategic business development and corporate finance activities of Los Gatos Ltd. and its subsidiaries. The services agreement included rights of termination with or without cause upon 30 days’ prior written notice by either party. The agreement included indemnification provisions by Los Gatos Ltd. in favor of Tigris L.P., its affiliates, and each of their officers, directors, employees, partners, shareholders and related persons against all claims, losses, damages, liabilities and expenses (including reasonable attorney’s fees) incurred by Tigris L.P. arising out of or related to the performance by Tigris L.P. of the services pursuant to the agreement. This agreement was terminated on August 1, 2011.
Effective May 11, 2010, Silver Opportunity Partners LLC, or SOP, a wholly-owned subsidiary of Precious Metals Opportunities LLC entered into a services agreement with Tigris Ltd., one of our stockholders. The agreement was not negotiated on an arm’s-length basis and was entered into prior to us adopting our related party transaction policy. Pursuant to the agreement, Tigris Ltd. agreed to provide SOP assistance with services, including: general business; investment, management and/or financial advice; internal bookkeeping services; general administrative services; network and communications services; supervision of outside service providers; and such other services as SOP and Tigris Ltd. may agree to from time to time. The agreement included indemnification provisions by SOP in favor of Tigris Ltd. and its owners, affiliates, officers, directors,
employees, agents and representatives against all claims, losses, damages, liabilities and expenses (including reasonable attorney’s fees) incurred by Tigris Ltd. arising out of or related to the performance by Tigris Ltd. of the services pursuant to the agreement. On August 1, 2011, this agreement was assigned to Sunshine Silver Mines Corporation, which replaced SOP as a party, and the agreement was revised so that it can be terminated only upon the mutual consent of the parties. This agreement was terminated on December 31, 2011.
Effective March 1, 2011,LGJV, we entered into a services agreement with Tigris Ltd. The agreement was not negotiated on an arm’s-length basisMPR, OSJ and was entered into prior to us adopting our related party transaction policy.SSJ. Pursuant to the agreement, Tigris Ltd.OSJ agreed to provide us assistance withto the LGJV certain consulting and administrative services, including: general business; investment, management and/or financial advice; internal bookkeeping services; general administrative services; networkincluding services necessary to explore, develop, construct and communications services; supervision of outside service providers;operate the LGJV and such other services as we and Tigris Ltd. may agree to from time to time. We agreed to pay Tigris Ltd. at cost for any out-of-pocket expenses incurred by them. Tigris Ltd. is not entitled to any additional, or other forms of, consideration for its services. The services agreement included rights of termination with or without cause upon 30 days’ prior written notice by either party.business development activities. The agreement included indemnification provisions by usMPR, SSJ in favor of Tigris Ltd.OSJ and its owners, affiliates, officers, directors, employees, agents and representativesindemnitees against all claims, losses, damages, liabilitiescosts, expenses and expenses (including reasonable attorney’s fees)charges incurred by Tigris Ltd.OSJ arising outas a result of any act or relatedomission with respect to the performance by Tigris Ltd.provision of the services pursuant to the agreement. This agreement, was terminated on August 1, 2011.except for willful misconduct or gross negligence.
Effective January 1, 2012, we entered into a services agreement with The Electrum Group LLC. The agreement was not negotiated on an arm’s-length basisLGJV paid $1.1 million and was entered into prior to us adopting our related party transaction policy. Pursuant to the agreement, The Electrum Group LLC agreed to provide us assistance with services, including: strategic business advice, preparation and review of banking and investor presentations, financial modeling, and assistance with identification and selection of executives and senior staff and such other services as we and The Electrum Group LLC may agree to from time to time. The agreement included indemnification provisions by us in favor of The Electrum Group LLC and its owners, affiliates, officers, directors, employees, agents and representatives against all claims, losses, damages, liabilities and expenses (including reasonable attorney’s fees) incurred by The Electrum Group LLC arising out of or related to the performance by The Electrum Group LLC of the services pursuant to the agreement. We agreed to pay $500,000 per annum for services under the agreement. Effective July 1, 2012, payments under this agreement were indefinitely suspended and the payments will not accrue during the suspension period.
Pursuant to these services agreements, the Company paid $250,000, $1,003,000, $1,000,000, $375,000 and $150,000$3.5 million for the years endingended December 31, 2012, 2011, 2010, 20092019 and 2008, respectively. In addition, pursuant to the services agreement between Los Gatos Ltd. and Tigris L.P., on October 2, 2009 Los Gatos Ltd. made a one-time grant to Tigris L.P. of 4,771,318 ordinary shares (valued at $48,000)2018, respectively, under this agreement. We had receivables in the capitalamount of Los Gatos Ltd., free of any restrictions on transferability.
Effective September 15, 2012, the Company has a related-party exploration services agreement with Electrum. Pursuant to this services agreement, the Company will provide certain consulting services. The Company has recorded a related-party receivable of $120,000 related to this agreement$4.1 million and $0.9 million as of December 31, 2012.2019 and 2018, respectively, under this agreement.
Exploration ActivityReorganization
From time Immediately prior to time,the closing of this offering, we have receivablesintend to effect the Reorganization in which (i) SOP will convert into a Delaware corporation named Silver Opportunity Partners Corporation, (ii) each shares of our common stock outstanding immediately prior to the Reorganization will be reclassified into (A) shares of our common stock and (B) shares of common stock of SOP Corporation and (iii) we will change our name from or payablesSunshine Silver Mining & Refining Corporation to other related parties under common control of ElectrumGatos Silver, Inc. SOP currently holds our interest in the normal courseSunshine Complex, which is located in the Coeur d'Alene Mining District in Idaho and is comprised of the Sunshine Mine and the Sunshine Big Creek Refinery. Through the Reorganization, we expect to distribute all of our exploration activities. These typically represent expenditures incurred by one party but paid by another. These amounts are settled by cash payment. Asequity interest in SOP to our shareholders immediately prior to the completion of December 31, 2012, 2011this offering. See "Prospectus Summary—Corporate Information and 2010 total receivables outstanding from these activities were approximately $120,000, $51,000Reorganization."
In connection with the Reorganization, we intend to enter into a Management Services Agreement with SOP, pursuant to which we will provide certain executive and $30,000, respectively, and total payables outstanding from these activities were approximately $0, $48,000 and $9,000, respectively.
Grant to Certain Executive Officers in Connection with This Offering
On July 31, 2012 our board of directors approved the sale Since April 2020, certain of our membership interestexecutive officers have deferred 20% of their salary. These executive officers will receive an aggregate of approximately shares of common stock in Calico Exploration LLC, or Calico, including all associated right, title and interest in mining claims and other properties held by Calicoconnection with this offering. The value of the shares of common stock to an affiliatebe granted to each executive officer represents 125% of The Electrum Group LLC. We had previously acquiredsuch executive officer's deferred salary. Each share of common stock is valued at $ , which is the Calico rights from The Electrum Group LLC pursuant to an assignmentmidpoint of The Electrum Group LLC’s rights to acquire an interest in a groupthe range set forth on the cover page of exploration properties and mining claims under a prospecting agreement that The Electrum Group LLC has with La Cuesta International Inc. Effective October 1, 2012, the Company transferred its ownership in Calico to The Electrum Group LLC for $336,000. The consideration exchanged reflected the Calico costs incurred through the effective date by the Company.this prospectus.
StockholdersShareholders Agreement
Prior to the consummation of this offering, we will enter into a stockholdersshareholders agreement with Electrum and Liberty Metals & MiningMERS pursuant to which Electrum and Liberty Metals & MiningMERS will have the right to nominate members
of our Board of Directors. Upon the consummation of this offering, Electrum will have the right to nominate: (a) a majority of members of our Board of Directors so long as Electrum beneficially owns in the aggregate at least 35% of the then outstanding shares of our common stock and (b) one member of our Board of Directors so long as Electrum beneficially owns in the aggregate (x) less than 35% of the then outstanding shares of our common stock and (y) at least 5% of the then outstanding shares of our common stock. Liberty Metals & MiningMERS will have the right to nominate one member of our Board of Directors for as long as they ownit owns at least 5% of the then outstanding shares of our common stock. The nominees of Electrum and Liberty Metals & MiningMERS will need to be approved by the Board of Directors and elected at the annual meeting of stockholders. See “Management—Board Composition.”shareholders.
The stockholdersshareholders agreement will also provide that for so long as Electrum owns at least 35% of the then outstanding shares of our common stock, certain actions by us will require the approval of Electrum in addition to any other vote by our Board or stockholders.shareholders. The actions requiring Electrum approval include:
In addition, we have agreedwill agree to indemnify Electrum and Liberty Metals & MiningMERS from any losses arising directly or indirectly out of Electrum’sElectrum's and Liberty Metals & Mining’sMERS's actual, alleged or deemed control or ability to influence control of us or the actual or alleged act or omission of Electrum’sElectrum's and Liberty Metals & Mining’sMERS's director nominees, including any act or omission in connection with this offering. If, for any reason our agreement to indemnify Electrum and MERS is unavailable or unenforceable, we will agree to make the maximum contribution to the payment and satisfaction of the indemnified liabilities permissible under applicable law.
Prior to the consummation of this offering, we will enter into a registration rights agreement with Electrum, Liberty Metals & MiningMERS and substantially all our other existing stockholders.shareholders. Pursuant to the registration rights agreement, Electrum and Liberty Metals and MiningMERS may require us to file a registration statement under the U.S. Securities Act, with respect to their shares following the expiration of the lock-up period described under “Shares"Shares Eligible for Future Shareholders—Lock-Up Agreements.”" We arewill not be obligated to effect more than three demand registrations within a 12 month12-month period. All stockholdersshareholders under the registration rights agreement arewill be entitled to piggyback registration rights with respect to any registration initiated by us or another stockholdershareholder or stockholdersshareholders after the consummation of this offering and will continue to hold this right until they transfer their shares.
In connection with this offering, we intend to enter into indemnification agreements with each of our directors and executive officers. These agreements, among other things, will require us to indemnify each director and executive officer to the fullest extent permitted by Delaware law, including indemnification of expenses such as attorneys’attorneys' fees, judgments, fines and settlement amounts incurred by the director or executive officer in any action or proceeding, including any action or proceeding by or in right of us, arising out of the person’sperson's services as a director or executive officer.
Sales of Shares of Common Stock
In August, September and November 2017, we entered into subscription agreements with certain investors with respect to the issuance and sale of shares of our common stock. The following table sets forth the number of shares of our common stock issued and sold to our directors, executive officers or holders of more than 5% of our capital stock at the time of or as a result of such issuance, and any affiliate or immediate family member thereof, pursuant to such subscription agreements:
Name | Number of Shares of Common Stock Purchased | Aggregate Purchase Price | |||||
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Electrum Silver US LLC | 5,777,777 | $ | 26,000 | ||||
Municipal Employees' Retirement System of Michigan | 2,777,778 | $ | 12,500 | ||||
In May, June and July 2019, we entered into subscription agreements with certain investors with respect to the issuance and sale of shares of our common stock. The following table sets forth the number of shares of our common stock issued and sold to our directors, executive officers or holders of more than 5% of our capital stock at the time of or as a result of such issuance, and any affiliate or immediate family member thereof, pursuant to such subscription agreements:
Name | Number of Shares of Common Stock Purchased | Aggregate Purchase Price | |||||
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Electrum Silver US LLC | 4,166,667 | $ | 25,000 | ||||
Municipal Employees' Retirement System of Michigan | 2,500,000 | $ | 15,000 | ||||
Stephen Orr(1) | 45,000 | $ | 270 | ||||
On April 20, 2020, we entered into a Convertible Note Purchase Agreement with Electrum Silver US LLC. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Convertible Notes." From April 20, 2020 to the date hereof, we issued and sold to Electrum Silver US LLC $ million aggregate principal amount of convertible notes. We expect that the outstanding convertible notes, and accrued but unpaid interest on such convertible notes, will convert to shares of our common stock in connection with this offering, unless the net proceeds from this offering exceed $ million, in which case we intend to use $ of the net proceeds to repay our outstanding convertible notes. See "Use of Proceeds."
Statement of Policy on Related PersonParty Transactions
Prior to the closing of this offering, we will adopt a related party transaction policy designed to minimize potential conflicts of interest arising from any dealings we may have with our affiliates and to
provide appropriate procedures for the disclosure, approval and resolution of any real or potential conflicts of interest that may exist from time to time. This policy will provide, among other things, that all related party transactions will be ratified and approved by disinterested members of our Board of Directors after receiving a recommendation from the Audit Committee that the transaction is fair, reasonable and within our policy. In making its recommendation, the Audit Committee will consider each related personparty transaction in light of all relevant factors, including without limitation the benefits of the transaction to us, the terms of the transaction and whether they are arm’sarm's length and in the ordinary course of our business, the direct or indirect nature of the related person’sparty's interest in the transaction, the size and expected term of the transaction, and other facts and circumstances that bear on the materiality of the related personparty transaction under applicable law and NYSEstock exchange standards.
PRINCIPAL STOCKHOLDERSDirected Share Program
At our request, the underwriters have reserved up to % of the shares of common stock offered by this prospectus, for sale, at the initial public offering price, to our employees and directors and to friends, professional contacts and family members of our employees and directors. We do not currently know the extent to which these related persons will participate in the directed share program, if at all.
The following table sets forth information regarding beneficial ownership of our common stock as of February 15, 2013,, 2020, after giving effect to (i) the Reorganization (ii) the issuance of an aggregate of shares of common stock to our executive officers in connection with this offering and (iii) the conversion of our outstanding convertible notes into an aggregate of shares of common stock in connection with this offering, by:
In accordance with the rules of the SEC, beneficial ownership includes voting or investment power with respect to securities and includes shares issuable pursuant to stock options that are exercisable within 60 days of February 15, 2013., 2020. Shares issuable pursuant to stock options are deemed outstanding for purposes of computing the percentage ownership of the person holding such options but are not outstanding for purposes of computing the percentage ownership of any other person. The percentage of beneficial ownership for the following table is based on 58,810,113 shares of common stock outstanding as of February 15, 2013,, 2020, and shares of common stock outstanding after the completion of this offering, assuming no exercise of the underwriters’ option to purchase additional shares.underwriters' over-allotment option. Unless otherwise indicated, the address for each listed stockholdershareholder is: c/o Sunshine Silver MinesMining & Refining Corporation, 370 17th1660 Lincoln Street, Suite 3800,2750, Denver, CO, 80202.80264. To our knowledge, except as indicated in the footnotes to this table and pursuant to applicable
community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them.
| Shares Beneficially Owned Before the Offering | Shares Beneficially Owned After the Offering | |||||||||||
Name and Address of Beneficial Owner | Number | Percent | Number | Percent | ||||||||
Executive Officers and Directors: | ||||||||||||
Stephen Orr(1) | 225,000 | * | ||||||||||
Roger Johnson(2) | 34,687 | * | ||||||||||
John Galassini(3) | 54,375 | * | ||||||||||
Philip Pyle (4) | 119,072 | * | ||||||||||
Jeffrey Reeser(5) | 24,375 | * | ||||||||||
John Ellis(6) | | 11,343 | | * | ||||||||
Marc Faber(6) | 11,343 | * | ||||||||||
Wayne Kirk(6) | 11,343 | * | ||||||||||
William Natbony(6)(7) | 470,310 | * | ||||||||||
Michael Parrett(6) | 11,343 | * | ||||||||||
David Peat(6) | 11,343 | * | ||||||||||
Diana Walters(6) | 11,343 | * | ||||||||||
All executive officers and directors as a group | 995,877 | 1.69 | % | |||||||||
Greater than 5% Stockholders: | ||||||||||||
Electrum: | ||||||||||||
Electrum Silver US LLC(8) | 40,247,743 | 68.4 | % | |||||||||
Tigris Group of Companies(9) | 1,433,888 | 2.4 | % | |||||||||
|
|
|
|
|
| |||||||
Total | 41,681,631 | 70.8 | % | |||||||||
Liberty Metals & Mining Holdings, LLC(10) | 8,845,577 | 15.0 | % | |||||||||
| Percentage of | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
Name of Beneficial Owner | Shares Beneficially Owned | Before This Offering | After This Offering | |||||||
Executive Officers and Directors: | ||||||||||
Stephen Orr | |||||||||||
Philip Pyle | |||||||||||
John Kinyon | |||||||||||
Roger Johnson | |||||||||||
Luis Felipe Huerta | |||||||||||
Adam Dubas | |||||||||||
Thomas S. Kaplan(2) | |||||||||||
Jeb Burns(3) | |||||||||||
Ali Erfan(4) | |||||||||||
Igor Gonzales | |||||||||||
Karl Hanneman | |||||||||||
Charles Hansard | |||||||||||
Igor Levental(5) | |||||||||||
David Peat | |||||||||||
Janice Stairs | |||||||||||
All executive officers, directors and director nominees as a |
|
Electrum(6): | ||||||||||
Electrum Silver US LLC |
Tigris Financial Group Ltd. | |||||||||||
Grat Holdings, LLC(9) | |||||||||||
Manul Capital Management LLC(10) | |||||||||||
Total | |||||||||||
Municipal Employees' Retirement System of |
Table of Contents |
The following descriptions are summaries of the material terms of our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws. Reference is made to the more detailed provisions of, and the descriptions are qualified in their entirety by reference to, the Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws, copies of which are filed with the SEC as exhibits to the registration statement of which this prospectus is a part, and applicable law.
Following this offering, our authorized capital stock will consist of shares of common stock, par value $0.001 per share, and shares of preferred stock, par value $$0.01 per share.
Common stock outstanding.As After giving effect to the Reorganization, as of December 31, 2012June 30, 2020, there were 58,810,113are shares of common stock outstanding which were held of record by 37 stockholders.shareholders. There will be shares of common stock outstanding, assuming no exercise of the underwriters’underwriters' over-allotment option, to purchase additional shares and no exercise of outstanding options and no conversion of outstanding DSUs, after giving effect to the sale of the shares of common stock offered hereby.hereby and the issuance of an aggregate of approximately shares of common stock to our executive officers in connection with this offering, All outstanding shares of common stock are fully paid and non-assessable, and the shares of common stock to be issued upon the completion of this offering will be fully paid and non-assessable.
Voting rights.The holders of common stock are entitled to one vote per share on all matters to be voted upon by the stockholders,shareholders, except on matters relating solely to terms of preferred stock.
Dividend rights.We do not intend to pay any dividends in the foreseeable future and currently intend to retain all future earnings to finance our business. Subject to preferences that may be applicable to any outstanding preferred stock, the holders of common stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by our Board of Directors out of funds legally available therefor. See “Dividend"Dividend Policy.”"
Rights upon liquidation.In the event of liquidation, dissolution or winding up, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of preferred stock, if any, then outstanding.
Other rights. The holders of our common stock have no preemptive or conversion or exchange rights or other subscription rights. There are no redemption, retraction, purchase for cancellation, surrender or sinking or purchase fund provisions applicable to the common stock.
Our Board of Directors has the authority to issue the preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series or the designation of such series, without further vote or action by the stockholders.shareholders. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control of our companyCompany without further action by the stockholdersshareholders and may adversely affect the voting and other rights of the holders of common stock. At present, we have no plans to issue any of the preferred stock.
Certain Amended and Restated Certificate of Incorporation and ByLawBylaw Provisions
Opt-Out of Section 203 of the DGCL
We have expressly elected not to be governed by the “business combination” provisions of Section 203 of the DGCL, until such time as Electrum ceases to own more than 50% of our outstanding common stock, after which we will be governed by those provisions. Section 203 prohibits a person who acquires more than 15% but less than 85% of all classes of our outstanding voting stock without the approval of our Board of Directors from merging or combining with us for a period of three years, unless the merger or combination is approved by a two-thirds vote of the shares not owned by such person. These provisions would apply even if the proposed merger or acquisition could be considered beneficial by some stockholders.
Requirements for Advance Notification of StockholderShareholder Nominations and Proposals
Our Amended and Restated Bylaws establish advance notice procedures with respect to stockholdershareholder proposals and nomination of candidates for election as directors that will apply after Electrum ceases to own more than 50% of our outstanding common stock.directors.
Limits on Written Consents
Prior to a transaction or series of transactions that results in Electrum ceasing to own more than 50% of our outstanding common stock, the stockholders may amend our Amended and Restated Certificate of Incorporation in any manner as permitted by the DGCL.
Following Electrum ceasing to own more than 50% of our outstanding common stock, any Any action required or permitted to be taken by the stockholdersshareholders must be effected at a duly called annual or special meeting of stockholdersshareholders and may not be effected by any consent in writing in lieu of a meeting of such stockholders,shareholders, subject to the rights of the holders of any series of preferred stock.
Limits on Special Meetings
Special meetings of the stockholdersshareholders may be called at any time only by the secretary at the direction of our Board of Directors pursuant to a resolution adopted by the Board of DirectorsDirectors.
Choice of Forum
Our Amended and Restated Certificate of Incorporation will provide 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: (i) any derivative action or proceeding brought on our behalf; (ii) any action asserting a breach of fiduciary duty; (iii) any action asserting a claim against us arising under the Delaware General Corporation Law; and (iv) any action asserting a claim against us that is governed by Electrum until it ceasesthe internal affairs doctrine. This provision does not apply to own more than 50%suits brought to enforce a duty or liability created by the Securities Act, the Exchange Act or any other claim for which the U.S. federal courts have exclusive jurisdiction. Our Amended and Restated Certificate of Incorporation will further provide 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 will also provide that any person or entity purchasing or otherwise acquiring or holding any interest in shares of our outstanding common stock.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 to be 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.
Corporate Opportunities
Our Amended and Restated Certificate of Incorporation provides that we renounce any interest in the business opportunities of Electrum and Liberty Metals & Mining and of our directors who are affiliated with Electrum, or Liberty Metals & Mining, other than directors employed by us,who are also our employees, and that neither our directors affiliated with Electrum, or Liberty Metals & Mining, other than directors employed by us,who are also our employees, nor Electrum or Liberty Metals & Mining have any obligation to offer us those opportunities. Electrum and Liberty Metals & Mining and any of our directors who are affiliated with them other than directors employed by uswho
are also our employees may, in the past, present or future, carry out and engage in any and all activities associated with any business, including, without limitation, any mining business.
Amendments to our Governing Documents
Generally, the amendment of our Amended and Restated Certificate of Incorporation requires approval by our Board of Directors and the vote of holders of more than 50%66.67% of the votes entitled to be cast by the outstanding capital stock in the election of our Board of Directors (which amount shall be raised to 66 2/3% of our outstanding capital stock following the time that Electrum ceases to own more than 50% of our outstanding common stock).Directors. Any amendment to our Amended and Restated Bylaws requires the approval of either a majority of our Board of Directors or holders of more than 50%66.7% of the votes entitled to be cast by the outstanding capital stock in the election of our Board of Directors (which amount shall be raised to 66 2/3% of our outstanding capital stock following the time that Electrum ceases to own more than 50% of our outstanding common stock).Directors.
Board of Directors
Initially, our Our Board of Directors will consist of a single class of directors each serving one year terms. Following Electrum ceasing to own more than 50% of our outstanding common stock, our Board of Directorsand directors will be divided into three classes of directors, with each class as nearly equal in number as possible, serving staggered three year termsserve until a successor is duly elected and qualified or until a director's earlier death, removal or resignation (other than directors that may be elected by holders of our preferred shares, if any).
Our Amended and Restated Certificate of Incorporation and our Amended and Restated Bylaws provide that at such date that Electrum ceases to own more than 50% of our outstanding common stock, directors may be removed only for cause and only by the affirmative vote of the holders of 66 2/3%66.67% of our outstanding voting stock, voting together as a single class, unless approved by our Board of Directors, in which case such removal for cause shall require the affirmative vote of the holders of more than 50% of our outstanding voting stock, voting together as a single class. Prior to that date, directors may be removed by holders of a majority of our outstanding voting stock, voting together as a single class. Our Amended and Restated Certificate of Incorporation and our Amended and Restated Bylaws provide that any vacancy on our Board of Directors, including a vacancy resulting from an enlargement of our Board of Directors, may be filled by vote of a majority of our directors then in office. Furthermore, our Amended and Restated Certificate of Incorporation provides that the authorized number of directors may be changed only by resolution of our Board of Directors.
Delaware Business Combination Statute
We will elect to be subject to Section 203 of the Delaware General Corporation Law, which regulates corporate acquisitions. Section 203 prevents an "interested stockholder," which is defined generally as a person owning 15% or more of a corporation's voting stock, or any affiliate or associate of that person, from engaging in a broad range of "business combinations" with the corporation for three years after becoming an interested stockholder unless:
Under Section 203, the restrictions described above also do not apply to specific business combinations proposed by an interested stockholder following the announcement or notification of designated extraordinary transactions involving the corporation and a person who had not been an interested stockholder during the previous three years or who became an interested stockholder with the approval of a majority of the corporation's directors, if such extraordinary transaction is approved or not opposed by a majority of the directors who were directors prior to any person becoming an
The Company will listinterested stockholder during the commonprevious three years or were recommended for election or elected to succeed such directors by a majority of such directors.
Section 203 may make it more difficult for a person who would be an interested stockholder to effect various business combinations with a corporation for a three-year period. Section 203 also may have the effect of preventing changes in our management and could make it more difficult to accomplish transactions which our stockholders may otherwise deem to be in their best interests.
Anti-Takeover Effects of Some Provisions
Some provisions of our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws could make the following more difficult:
These provisions, as well as our ability to issue preferred stock, onare designed to discourage coercive takeover practices and inadequate takeover bids. These provisions are also designed to encourage persons seeking to acquire control of us to first negotiate with our board of directors. We believe that the New York Stock Exchange underbenefits of increased protection give us the symbol “SSMC.” The Company haspotential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us, and that the benefits of this increased protection outweigh the disadvantages of discouraging those proposals, because negotiation of those proposals could result in an improvement of their terms.
We have applied to list the common stock on the Toronto Stock Exchange under the symbol “SM.”The listing of our common stock on the Toronto Stock Exchange will be subject to our fulfilling all ofNYSE and TSX under the listing requirements of the Toronto Stock Exchange.symbol "GATO."
The Transfer AgentU.S. transfer agent and Registrarregistrar for the common stock is ComputershareEQ by Equiniti, located at 1110 Centre Pointe Curve, Suite 101, Mendota Heights, Minnesota 55120 and the Canadian transfer agent and registrar for the common stock is TSX Trust Company, N.A.located at 100 Adelaide Street West, Suite 301, Toronto, Ontario, M5H 1S3.
U.S. FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS OF COMMON STOCK
The following is a discussion ofare the material U.S. federal income and estate tax consequences that apply to you if you are a “non-U.S. holder,” as defined below, who beneficially ownsof the ownership and disposition of our common stock butacquired in this offering by a "Non-U.S. Holder" that does not own, and has not at any time owned, actually or constructively (as determined for purposes of the provisions of U.S. federal income tax law applicable to non-U.S. holders of shares of a USRPHC, as defined below), more than 5% of our common stock. This discussion appliesSubject to the exceptions set forth below, you only if you purchase our common stock in connection with this offering and will hold our common stock as a capital asset. You are a “non-U.S. holder”Non-U.S. Holder if for U.S. federal income tax purposes you are a beneficial owner of our common stock and you are:
individual;
but You are not a Non-U.S. Holder, however, if you are ana nonresident alien individual who is present in the United States for 183 days or more in the taxable year of dispositionin which you sell any of our common stock and, certain other requirements being met, is not otherwiseor if you are a former citizen or former resident of the United States, or an entity that has expatriated from the United States, for U.S. federal income tax purposes. If you are such an individual,a person, you should consult your tax adviser regarding the U.S. federal income tax consequences of the sale, exchange or otherownership and disposition of our common stock.
If you are a partnership for U.S. federal income tax purposes, or a partner in a partnership, the U.S. federal income tax consequencestreatment of owning and disposing of our common stocka partner will generally depend on the status of the partner and upon the activities of the partnership. Partnerships owning common stock and partners in such partnerships should consult their tax advisers as to the particular U.S. federal income tax consequences of owning and disposing of our common stock.your activities.
This discussion is based on the Internal Revenue Code of 1986, as amended to the date hereof (the "Code"), administrative pronouncements, judicial decisions and final, temporary and proposed Treasury Regulations, all as of the date hereof,regulations, changes to any of which subsequent to the date of this prospectus may affect the tax consequences described herein.herein, possibly with retroactive effect. This discussion does not addressdescribe all aspects of U.S. federal income and estate taxationthe tax consequences that may be relevant to you in light of your particular circumstances and does not address any aspect of state, local or non-U.S. taxation, or any taxes other than income and estate taxes. You should consult your tax adviser with regard to the application of the U.S. federal tax laws to your particular situation, as well as any tax consequences arising under the laws of any state, local or foreign jurisdiction. You should consult your tax adviser with respect to the particular tax consequences to you of owning and disposing of our common stock, including the consequences under the laws of any state, local or foreignnon-U.S. taxing jurisdiction.
As discussed under “Dividend Policy”"Dividend Policy" above, we do not currently expect to pay dividends.make distributions on our common stock. In the event that we do paymake distributions of cash or other property, those distributions will constitute dividends dividends you receive onfor U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. To the extent those distributions exceed our current and accumulated earnings and profits, they will constitute a return of capital, which will first reduce your basis in our common stock, but not below zero, and then will be treated as gain from the sale of our common stock, as described below under "—Gain on Disposition of Our Common Stock."
Dividends paid to you generally will be subject to withholding tax at a 30% rate or a reduced rate specified by an applicable income tax treaty. In order to obtain a reduced rate of withholding (subject to the discussion below under "—FATCA"), you mustwill be required to provide ana properly executed applicable Internal Revenue Service ("IRS") Form W-8BENW-8 certifying your entitlement to benefits under a treaty.
The withholding tax does not apply to If dividends paid to you if you provide an Internal Revenue Service Form W-8ECI certifying that the dividends are effectively connected with your conduct of a trade or business withinin the United States and,(and, if required by an applicable income tax treaty, is alsoare attributable to a permanent establishment or fixed base maintained by you in the United States. Instead,States), you will generally be taxed on the effectively connected dividends in the same manner as a U.S. person. In this case, you will be subjectexempt from the withholding tax
discussed in the preceding paragraph, although you will be required to regularprovide a properly executed IRS Form W-8ECI in order to claim an exemption from withholding. You should consult your tax adviser with respect to other U.S. income tax as ifconsequences of the you wereownership of our common stock, including the possible imposition of a U.S. resident, subject to an applicable incomebranch profits tax treaty providing otherwise. If you are a non-U.S. corporation receiving effectively connected dividends, you may also be subject to an additional “branch profits tax” imposed at a rate of 30% (or a lower treaty rate). if you are a corporation.
Gain on Disposition of Our Common Stock
You Subject to the discussion below under "—Information Reporting and Backup Withholding," you generally will generally not be subject to U.S. federal income or withholding tax on gain realized on a sale or other taxable disposition of our common stock unless either (i) unless:
We believe that we are not, and do not anticipate becoming, a USRPHC.
Gain If you recognize gain on a sale or other disposition of our common stock that is effectively connected with your conduct of a trade or business in the United States will be subject to regular U.S.(and if required by an applicable income tax as iftreaty, is attributable to a permanent establishment or fixed base maintained by you werein the United States), you will generally be taxed on such gain in the same manner as a U.S. resident, subjectperson. You should consult your tax adviser with respect to an applicable treaty providing otherwise. If you areother U.S. tax consequences of the disposition of our common stock, including the possible imposition of a non-U.S. corporation recognizing effectively connected gain, you may also be subject to an additional “branchbranch profits tax” imposedtax at a rate of 30% (or a lower treaty rate).
A corporation is generally a USRPHC if 50% or more of the fair market value of its real property assets and its other assets used or held for use in a trade or business consist of U.S. real property interests, as defined in the Code and applicable regulations. Based on our estimates of the current relative fair market values of our U.S. real property interests and other assets, we believe we are not currently a USRPHC. However, both because the determination of the value of our mineral assets is uncertain and requires the use of subjective estimates, and because the relative fair market values of our assets will likely fluctuate over time (based on, for example, the results of the exploration and development of our properties), there can be no assurance that we are not, or will not become, a USRPHC. Even if weyou are a USRPHC, for so long as our common stock is regularly traded on an established securities market (such as the NYSE), you will not recognize taxable gain on a sale of our common stock under the rules applicable to USRPHCs unless you actually or constructively own more than 5% of our common stock at any time during the five-year period ending on the date of disposition or, if shorter, your holding period for our common stock. If our common stock was not considered to be regularly traded on an established securities market for purposes of these rules, you would be subject to U.S. federal income tax on any gain recognized on the disposition of all or a portion of our common stock in generally the same manner as described above with respect to gain that is effectively connected with the conduct of a trade or business in the United States.corporation.
Information Reporting and Backup Withholding Requirements
Information returns willare required to be filed with the Internal Revenue ServiceIRS in connection with payments of dividends on our common stock. You may have toUnless you comply with certification procedures to establish that you are not a U.S. person, information returns may also be filed with the IRS in order to avoid information reporting and backup withholding requirementsconnection with respect to payments of dividends or the proceeds offrom a sale or other disposition of our common stock. TheYou may be subject to backup withholding on payments on our common stock or on the proceeds from a sale or other disposition of our common stock unless you comply with certification procedures required to claimestablish that you are not a reduced rateU.S. person or otherwise establish an exemption. Your provision of withholding under a treatyproperly executed applicable IRS Form W-8 certifying your non-U.S. status will satisfy the certification requirements necessarypermit you to avoid backup withholding. Amounts withheld under the backup withholding as well. You willrules are not additional taxes and may be allowed a creditrefunded or credited against your U.S. federal income tax liability, if any, for, and may be entitledprovided that the required information is timely furnished to a refundthe IRS.
Provisions of the amountCode commonly referred to as "FATCA" require withholding of any backup withholding from a payment30% on payments of dividends to your or the gross proceeds you receive from a sale or disposition ofon our common stock provided that you timely furnish the required information to the Internal Revenue Service.
Recent Legislation
Recent legislation will generally impose, effective"foreign financial institutions" (which is broadly defined for payments made after December 31, 2012, withholding at a rate of 30% on dividendsthis purpose and the gross proceeds of a disposition of common stock paid toin general includes investment vehicles) and certain foreignother non-U.S. entities including financial institutions, unless various U.S. information reporting and due diligence requirements are satisfied. As a result,(generally relating to ownership by U.S. persons of interests in or accounts with those entities) have been satisfied or an exemption applies. An intergovernmental agreement between the entity through whichUnited States and an applicable foreign country may modify these requirements. Proposed regulations provide that the FATCA tax will not apply to gross proceeds from the disposition of shares of U.S. corporations, such as our common
stock, is held by you will affectas otherwise would have been the determination of whethercase after December 31, 2018, and Treasury has stated that taxpayers may rely on the proposed regulations until final regulations are issued. If FATCA withholding is required. The new withholding regime will apply in conjunction with the existing rules described in “—Dividends” and “—Information Reporting and Backup Withholding Requirements” above.imposed, a beneficial owner that is not a foreign financial institution generally may obtain a refund of any amounts withheld by filing a U.S. federal income tax return (which may entail significant administrative burden). You should consult your tax adviser regarding the possible implicationseffects of this legislationFATCA on your investment in our common stock.
If you are an individual or an entity Individual Non-U.S. Holders and entities the property of which is potentially includible in such an individual Non-U.S. Holder’sindividual's gross estate for U.S. federal estate tax purposes (for example, a trust funded by such an individual Non-U.S. Holder and with respect to which the individual has retained certain interests or powers), you should note that, absent an applicable treaty benefit,exemption, our common stock will be treated as U.S. situsU.S.-situs property subject to U.S. federal estate tax.
CANADIAN FEDERAL INCOME TAX CONSEQUENCES FOR NON-U.S.CANADIAN HOLDERS
The following summary describes the principal Canadian federal income tax considerations under theIncome Tax Act (Canada) and theIncome Tax Regulations or, collectively, the Tax Act, generally applicable to a purchaser who acquires as beneficial owner our common stock pursuant to this offering and who, at all relevant times, for purposes of the Tax Act, (i) is, or is deemed to be, resident in Canada; (ii) deals at arm’sarm's length with the Company;Company and the underwriters; (iii) is not affiliated with the Company;Company and the underwriters; (iv) is not in a relationship with us such that we would be considered a “foreign affiliate”"foreign affiliate" of such purchaser; and (v) holds our common stock as capital property or a Holder.(a "Holder"). Generally, our common stock will be capital property to a Holder provided the Holder does not acquire or hold our common stock in the course of carrying on a business or as part of an adventure or concern in the nature of trade.
This summary is not applicable to (i) a purchaserHolder an interest in which is a “tax"tax shelter investment”investment", (ii) a purchaserHolder that is a “financial institution”"financial institution" for purposes of certain rules referred to as the mark-to-market rules, or (iii) a purchaserHolder that is a "specified financial institution", (iv) a Holder that is a partnership or exempt from tax under Part I of the Tax Act, (v) a Holder that reports its “Canadian"Canadian tax results”results" in a currency other than Canadian currency, or (vi) a Holder that has entered or will enter into, in respect of our common stock, a "synthetic disposition arrangement" or a "derivative forward agreement", each as defined in the Tax Act. Additional considerations, not discussed herein, may be applicable to a purchaserHolder that is a corporation that is, or becomes as part of a transaction or event or series of transactions or events that includes the acquisition of our common stock, controlled by a non-resident corporationperson or group of non-resident persons for the purposes of the foreign affiliate dumping rules in section 212.3 of the Tax Act. Such purchasersHolders should consult their own tax advisors.
This summary is based on the current provisions of the Tax Act, and an understanding of the current administrative policies and assessing practices of the Canada Revenue Agency published in writing prior to the date hereof. This summary takes into account all specific proposals to amend the Tax Act publicly announced by or on behalf of the Minister of Finance (Canada) prior to the date hereof, or the Proposed Amendments, and assumes that all Proposed Amendments will be enacted in the form proposed. However, no assurances can be given that the Proposed Amendments will be enacted as proposed, or at all. This summary does not otherwise take into account or anticipate any changes in law or administrative policy or assessing practice whether by legislative, administrative or judicial action nor does it take into account tax legislation or considerations of any province, territory or foreign jurisdiction, which may differ from those discussed herein.
This summary is of a general nature only and is not, and is not intended to be, legal or tax advice to any prospective purchaser or holder of our common stock. This summary is not exhaustive of all Canadian federal income tax considerations. Accordingly, prospective purchasers of our common stock should consult their own tax advisors having regard to their own particular circumstances.
Generally, for purposes of the Tax Act, all amounts relating to the acquisition, holding or disposition of our common stock must be converted into Canadian dollars based on the exchange rates as determined in accordance with the Tax Act. The amount of dividends required to be included in the income of, and capital gains or capital losses realized by, a Holder may be affected by fluctuations in the Canadian / U.S. dollar exchange rate.
A Holder will be required to include in computing its income for a taxation year the amount of any dividends received on our common stock. In the case of a Holder that is an individual, such dividends willnot be subject to the gross-up and dividend tax credit rules applicable to taxable
dividends received from taxable Canadian corporations. A Holder that is a corporation willnot be entitled to deduct the amount of such dividends in computing its taxable income. The full amount of the dividends, including amounts deducted for U.S. withholding tax, if any, in respect of the dividends must be included in income. To the extent U.S. withholding tax is paid in respect of dividends paid on our common stock, the amount of such tax generally will be eligible for foreign tax credit or deduction treatment subject to the detailed rules and limitations under the Tax Act.
Holders are advised to consult their own tax advisors with respect to the availability of a credit or deduction to them having regard to their particular circumstances.
Generally, on a disposition or deemed disposition of a share of our common stock, a Holder will realize a capital gain (or capital loss) equal to the amount, if any, by which the proceeds of disposition, net of any reasonable costs of disposition, exceed (or are less than) the adjusted cost base to the Holder of the share immediately before the disposition or deemed disposition.
The adjusted cost base to the Holder of a share of our common stock acquired pursuant to this offering will be determined by averaging the cost of such share with the adjusted cost base immediately before the time of acquisition of all other shares of our common stock owned by the Holder as capital property immediately before that time, if any.
Generally, a Holder is required to include in computing its income for a taxation year one-half of the amount of any capital gain, or a taxable capital gain, realized in the year. Subject to and in accordance with the provisions of the Tax Act, a Holder is required to deduct one-half of the amount of any capital loss, or an allowable capital loss, realized in a taxation year from taxable capital gains realized by the Holder in the year and allowable capital losses in excess of taxable capital gains for the year may be carried back and deducted in any of the three preceding taxation years or carried forward and deducted in any subsequent taxation year against net taxable capital gains realized in such years. Capital gains realized by a Holder that is an individual or trust, other than certain specified trusts, may give rise to a liability for alternative minimum tax under the Tax Act.
To the extent U.S. tax is paid in respect of capital gains realized on the disposition or deemed disposition of a share of our common stock, the amount of such tax generally will be eligible for foreign tax credit treatment subject to the detailed rules and limitations under the Tax Act. Holders are advised to consult their own tax advisors with respect to the availability of a credit to them having regard to their particular circumstances.
On the date of issue, provided that our common stock is listed at that time on a designated stock exchange, (within the meaning of the Tax Act), which currently includes the Toronto Stock ExchangeNYSE and the New York Stock Exchange,TSX, shares of our common stock will be qualified investments under the Tax Act for trusts governed by registered retirement savings plans or RRSPs,("RRSPs"), registered retirement income funds or RRIFs,("RRIFs"), registered education savings plans ("RESPs"), deferred profit sharing plans, registered disability savings plans ("RDSPs") and tax-free savings accounts or TFSAs.("TFSAs"). Provided the holder of a TFSA or RDSP, the annuitant of an RRSP or RRIF, or the subscriber of an RESP, as the case may be, (A)(i) does not have a “significant interest”"significant interest" (within the meaning of the Tax Act) in us, and (B) does not have a “significant interest”(ii) deals at arm's length with us (within the meaning of the Tax Act) in a corporation, partnership or trust that does not deal at arm’s length with us,, such shares will not be a prohibited investment under the Tax Act for such TFSA, RRSP, RRIF, RESP or RRIF.Proposed amendments to the Tax Act released on December 21, 2012 would delete the condition in (B) above.RDSP. In addition, pursuant to such proposed amendments the shares of our common stock will generally not be a “prohibited investment”"prohibited investment" if such shares are “excluded property” (as defined in"excluded property" (within the proposed amendments)meaning of the Tax Act). Annuitants under an RRSP or RRIF, or holders of a TFSA or RDSP, and subscribers of an RESP should consult their own tax advisors as to whether shares of our common stock will be a “prohibited investment”"prohibited investment" for such RRSP, RRIF, TFSA, RESP or TFSARDSP in their particular circumstances.
Offshore Investment Fund Property
The rules of the Tax Act with respect to acquisition of offshore investment fund property, as would be amended by certain Proposed Amendments in Bill C-48,contains provisions (the "OIF Rules") which received its First Reading on November 21, 2012 and which is currently at Second Reading in the House of Commons, may, in certain circumstances, require a Holder to include an amount in income in each taxation year in respect of the acquisition and holding of our common stock, if (1) the value of such common stock may reasonably be considered to be derived, directly or indirectly, primarily from portfolio investments in: (i) shares of the capital stock of one or more corporations,
(ii) indebtedness or annuities, (iii) interests in one or more corporations, trusts, partnerships, organizations, funds or entities, (iv) commodities, (v) real estate, (vi) Canadian or foreign resource properties, (vii) currency of a country other than Canada, (viii) rights or options to acquire or dispose of any of the foregoing, or (ix) any combination of the foregoing or, collectively, Investment Assets. We are of the view that our common stock should not(collectively, "Investment Assets") and (2) it may reasonably be an offshore investment fund property.
Furthermore, in order for these rules to apply to a Holder in respect of our common stock, if, contrary to our view, it is an offshore investment fund property, it must be reasonable to concludeconcluded that one of the main reasons for the Holder acquiring, holding or holdinghaving shares of our common stock was to derive a benefit from portfolio investments in Investment Assets in such a manner that the taxes, if any, on the income, profits and gains from such Investment Assets for any particular year are significantly less than the tax that would have been applicable under Part I of the Tax Act if the income, profits and gains had been earned directly by the Holder.
In making the determination under point (2) in the preceding paragraph, the OIF Rules provide that regard must be had to all of the circumstances, including (i) the nature, organization and operation of any non-resident entity, including the Company, and the form of, and the terms and conditions governing, the Holder's interest in, or connection with, any such non-resident entity, (ii) the extent to which any income, profit and gains that may reasonably be considered to be earned or accrued, whether directly or indirectly, for the benefit of any non-resident entity, including the Company, are subject to an income or profits tax that is significantly less than the income tax that would be applicable to such income, profits and gains if they were earned directly by the Holder, and (iii) the extent to which any income, profits and gains of any non-resident entity, including the Company, for any fiscal period are distributed in that or the immediately following fiscal period.
If applicable, the OIF Rules generally require a Holder to include in the Holder's income for each taxation year in which such Holder owns our common stock the amount, if any, by which (i) the total of all amounts each of which is the product obtained when the Holder's "designated cost" (as defined in the Tax Act) of our common stock at the end of a month in the year is multiplied by 1/12 of the aggregate of the prescribed rate of interest for the period including that month plus two percentage points exceeds (ii) any dividends or other amounts included in computing such Holder's income for the year (other than a capital gain) from our common stock determined without reference to the OIF Rules. Any amount required to be included in computing a Holder's income in respect of our common stock under these provisions will be added to the adjusted cost base and the designated cost of our common stock to the Holder.
The CRA has taken the position that the term "portfolio investment" should be given a broad interpretation. Notwithstanding this interpretation, we do not believe that the value of shares of our common stock should be regarded as being derived, directly or indirectly, primarily from portfolio investments in Investment Assets, though the CRA may take a different view. However, if the term "portfolio investment" should be given a broad interpretation, and even if the value of shares of our common stock may reasonably be considered to be derived, directly or indirectly, primarily from portfolio investments in Investment Assets, the OIF Rules will apply to a Holder only if it is reasonable to conclude that one of the main reasons for the Holder acquiring, holding or having our common stock was to derive a benefit from Investment Assets in such a manner that the taxes, if any, on the income, profits and gains from such Investment Assets for any particular year are significantly less than the tax that would have been applicable under Part I of the Tax Act if the income, profits and gains had been earned directly by the Holder.
These rulesOIF Rules are complex and their application depends, in part, on the reasons for a Holder acquiring or holding our common stock. Holders are urged to consult their own tax advisors regarding the application and consequences of these rules in their own particular circumstances.
A Holder that is, throughout its taxation year, a "Canadian-controlled private corporation" (as defined in the Tax Act) may be subject to pay a refundable tax on its "aggregate investment income" (as defined in the Tax Act), including amounts in respect of net taxable capital gains and certain dividends.
Foreign Property Information Reporting
In general, a Holder that is a “specified"specified Canadian entity”entity" for a taxation year or fiscal period and whose total cost amount of “specified"specified foreign property”property" (as such terms are defined in the Tax Act) including our common stock at any time in the taxation year or fiscal period exceeds CAD $100,000 will be required to file an information return for the taxation year or fiscal period disclosing certain prescribed information. Subject to certain exceptions, a taxpayer resident in Canada will generally be a specified Canadian entity. Our common stock will come within the definition of “specified"specified foreign property”property" for the purposes of the Tax Act. Penalties will apply where a Holder fails to file the required information return in respect of such Holder's "specified foreign property" on a timely basis in accordance with the Tax Act.
In the 2010 Federal Budget, the Minister of Finance proposed to expand the existing reporting requirements with respect to “specified foreign property” so that more detailed information is available for audit use. Revised legislation reflecting such proposal has not yet been released.The reporting rules in the Tax Act are complex and this summary does not purport to explain all circumstances in which reporting may be required.
Holders should consult their own tax advisors regarding whether they must comply with these reporting requirements including any expansion thereof pursuant to the above-mentioned 2010 Federal Budget proposal.requirements.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock. Future sales of substantial amounts of our common stock in the public market could adversely affect market prices prevailing from time to time. Furthermore, because only a limited number of shares will be available for sale shortly after this offering due to existing contractual and legal restrictions on resale as described below, there may be sales of substantial amounts of our common stock in the public market after the restrictions lapse. This may adversely affect the prevailing market price and our ability to raise equity capital in the future.
Upon the completion of this offering, after giving effect to (i) the Reorganization, (ii) the issuance of an aggregate of shares of common stock to our executive officers in connection with this offering and (iii) the conversion of our outstanding convertible notes into an aggregate of shares of common stock in connection with this offering, we will have shares of common stock outstanding, assuming no exercise of the underwriters’underwriters' over-allotment option, to purchase additional shares and no exercise of any options outstanding as of December 31, 2012.the date hereof and no conversion of any DSUs outstanding on the date hereof. All of the shares sold in this offering will be freely transferable without restriction or registration under the U.S. Securities Act, except for any shares purchased by one of our existing “affiliates,”"affiliates," as that term is defined in Rule 144 under the U.S. Securities Act,Act. See "Underwriting and certain shares sold pursuant to the directed share program. See “Underwriting.”Plan of Distribution." The remaining shares of common stock outstanding are “restricted shares”"restricted shares" as defined in Rule 144. Restricted shares may be sold in the public market only if registered or if they qualify for the exemption from registration under Rules 144 or 701 under the U.S. Securities Act. As a result of the contractual 180-day lock-up period described below and the provisions of Rules 144 and 701, these shares will be available for sale in the public market as follows:
Number of Shares | Date | ||
|---|---|---|---|
| |||
| On the date of this prospectus. | |||
| After 90 days from the date of this prospectus. | |||
| After 180 days from the date of this prospectus (subject, in some cases, to volume limitations). |
In general, under Rule 144, beginning 90 days after the date of this offering, subject to the terms of any lock-up agreement described below, an affiliatea person who has beneficially owned restricted shares of our common stock for at least six months would be entitled to sell such securities, provided that (i) such person is not deemed to have been one of our affiliates at the time of, or at any time during the 90 days preceding, a sale and (ii) we are subject to the Exchange Act periodic reporting requirements for at least 90 days before the sale. Persons who have beneficially owned restricted shares of our common stock for at least six months but who are our affiliates at the time of, or any time during the 90 days preceding, a sale, would be subject to additional restrictions, by which such person would be entitled to sell within any three-monththree month period only a number of such sharessecurities that does not exceed the greater of (a) either of the following:
provided, in each case, that we are subject to the Exchange Act periodic reporting requirements for at least 90 days before the sale. SalesSuch sales both by affiliates under Rule 144 areand by non-affiliates must also limited bycomply with
the manner of sale, provisions and notice requirements and the availability of current public information about us.
Following this offering, subjectand notice provisions of Rule 144 to the terms of any lock-up agreement described below, a person that is not an affiliate of ours at the time of, or at any time during the three months preceding, a sale and who has beneficially owned restricted shares of our common stock for at least six months, may sell such shares without complying with the volume limitation, manner of sale or notice provisions described above, and any such person who has beneficially owned restricted shares of our common stock for at least one year may sell such shares without complying with the abovementioned restrictions and the current public information requirement.
We are unable to estimate the number of shares that will be sold under Rule 144 since this will depend on the market price for our common stock, the personal circumstances of the stockholder and other factors.extent applicable.
In general, under Rule 701, any of our employees, directors, officers, consultants or advisors who purchasespurchase shares from us in connection with a compensatory stock or option plan or other written agreement before the
effective date of this offering is entitled to resell such shares 90 days after the effective date of this offering in reliance on Rule 144, without having to comply with the holding period requirements or certain other restrictions contained in Rule 701.
The SEC has indicated that Rule 701 will apply to typical stock options granted by an issuer before it becomes subject to the reporting requirements of the Exchange Act, along with the shares acquired upon exercise of such options, including exercises after the date of this prospectus. Securities issued in reliance on Rule 701 are restricted securities and, subject to the terms of any lock-up agreement described below, beginning 90 days after the date of this prospectus, may be sold by persons other than “affiliates,”"affiliates," as defined in Rule 144, subject only to the manner of sale provisions of Rule 144, and by “affiliates”"affiliates" under Rule 144 without compliance with its one-year minimum holding period requirement.
As of February 16, 2013,June 30, 2020, options to purchase a total of 3,155,0478,699,028 shares of our common stock were outstanding.outstanding, substantially all of the shares subject to optionswhich are subject to lock-up agreements. After this offering, an additional shares of our common stock will be available for future option grants under our stock plans.Long Term Incentive Plan.
Upon the completion of this offering, we intend to file a registration statement under the U.S. Securities Act covering all shares of common stock subject to outstanding options or issuable pursuant to our Long Term Incentive Plan. Shares registered under thissuch registration statement will be available for sale in the open market, subject to Rule 144 volume limitations applicable to affiliates, vesting restrictions with us or the terms of any lock-up agreement described below.
We, our executive officers and directors and the holders of substantially all of our outstanding shares of common stock have entered into lock-up agreements with the underwriters. Under these agreements, subject to certain exceptions, we and each of these persons may not, without the prior written approval of Morgan StanleyBMO Capital Markets Corp., Goldman Sachs & Co. LLC and RBC Capital Markets, LLC, offer, sell, contract to sell, pledge, or otherwise dispose of, directly or indirectly, or hedge our common stock or securities convertible into or exchangeable or exercisable for our common stock. These restrictions will be in effect for a period of 180 days after the date of this prospectus, which period is subject to extension in the circumstances described in the paragraph below.extension. At any time, and without public notice, Morgan StanleyBMO Capital Markets Corp., Goldman Sachs & Co. LLC and RBC Capital Markets, LLC may, in itstheir sole discretion, release some or all the securities from these lock-up agreements. There are no agreements, understandings or intentions, tacit or explicit, to release any of the common stock subject to lock-up agreements prior to the expiration of the lock-up period.
Prior to the consummation of this offering, we will enter into a registration rights agreement with certain of our stockholdersshareholders pursuant to which we will grant certain of our stockholdersshareholders and their affiliates certain registration rights with respect to our shares of common stock owned by them following the expiration of the lock-up period described above under “—"—Lock-up Agreements.”" See "Certain Relationships and Related Party Transactions—Registration Rights Agreement."
UNDERWRITING AND PLAN OF DISTRIBUTION
We are offering the shares of our common stock described in this prospectus through the underwriters named below. Morgan StanleyBMO Capital Markets Corp., Goldman Sachs & Co. LLC and RBC Capital Markets, LLC BMO Capital Markets Corp. and Citigroup Global Markets Inc. are acting as joint book-running managers of this offering and as the representatives of the underwriters. We have entered into an underwriting agreement dated , 2013 with the representatives. Subject to the terms and conditions of the underwriting agreement, each of the underwriters has severally agreed to purchase the number of shares of common stock listed next to its name in the following table.
Underwriters | Number of shares | |
|---|---|---|
| ||
| ||
RBC Capital Markets, LLC | ||
| | | |
| ||
| | |
| | | |
| | |
The offering is being made concurrently in the United States and in each of the provinces in Canada, other than Québec. Our common stock will be offered in the United States through those underwriters who are registered to offer the common stock for the sale in the United States and such other registered dealers as may be designated by the underwriters. Our common stock will be offered in each of the provinces of Canada, other than Québec, through BMO Nesbitt Burns Inc., Goldman Sachs Canada Inc., RBC Dominion Securities Inc. and such other registered dealers as may be designated by the underwriters. Subject to applicable law, the underwriters, or such other registered dealers or other entities outside the United States and Canada that are affiliates of the underwriters as may be designated by the underwriters, may offer the common stock outside of the United States and Canada.
The underwriting agreement provides for a firm commitment underwriting, and the underwriters must buy all of the shares if they buy any of them. However, the underwriters are not required to pay for the shares covered by the underwriters’underwriters' over-allotment option described below. In Canada, the shares are to be taken up by the underwriters, if at all, on or before a date not later than 42 days after the date of this prospectus.
Our common stock is offered subject to a number of conditions, including:
The obligation of the underwriters under the underwriting agreement may also be terminated at their discretion upon the occurrence of certain stated events, including, without limitation: a material adverse change in our business that makes it impractical or inadvisable to proceed with the offering; a suspension or material limitation of trading generally on certain securities markets; a suspension or material limitation in trading in shares of our common stock on the New York Stock ExchangeNYSE or the Toronto Stock Exchange;TSX; a general moratorium on commercial banking activities or a material disruption in commercial banking or securities settlement services; and an outbreak or escalation of hostilities or acts of terrorism or any other calamity or crisis or any change in financial, political or economic conditions, in each case that makes it impractical or inadvisable to proceed with the offering.
We have been advised by the representatives that the underwriters intend to make a market in our common stock but that they are not obligated to do so and may discontinue making a market at any time without notice.
In connection with this offering, certain of the underwriters or securities dealers may distribute prospectuses electronically.
We have granted the underwriters an option to buy up to an aggregate of additional shares of our common stock. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with this offering. The underwriters have 30 days from the date of this prospectus to exercise this option. If the underwriters exercise this option, they will each purchase additional shares approximately in proportion to the amounts specified in the table above.
Shares sold by the underwriters to the public will initially be offered at the initial offering price set forth on the cover of this prospectus. Any shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. If all the shares are not sold after the underwriters have made a reasonable effort to sell the shares at the initial public offering price, the representatives may change the offering price and the other selling terms, provided that the price for the shares shall not exceed the public offering price and further provided that the compensation that is realized by the underwriters will be decreased by the amount that the aggregate price paid by the purchasers for the shares is less than the gross proceeds paid by the underwriters to us. Upon execution of the underwriting agreement, the underwriters will be obligated to purchase the shares at the prices and upon the terms stated therein. The representatives of the underwriters have informed us that they do not expect to sell more than an aggregate of five percent of the total number of shares of common stock offered by them to accounts over which such representatives exercise discretionary authority.
The following table shows the per share and total underwriting discounts and commissions we will pay to the underwriters assuming both no exercise and full exercise of the underwriters’underwriters' option to purchase up to additional shares.shares to cover over-allotments.
| No exercise | Full exercise | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Per share | $ | $ | ||||||||||||||
| | | | | | | | | |||||||||
Total | $ | $ | ||||||||||||||
| | | | | | | | | |||||||||
| | | | | | | | | |||||||||
| | | | | | | | | |||||||||
We estimate that the total expenses of the offering payable by us, not including the underwriting discounts and commissions, will be approximately $ million. The underwritersWe have agreed to reimburse usthe underwriters for a portionexpenses relating to the clearance of our expenses incurred in connectionthis offering with the offering.Financial Industry Regulatory Authority up to $35,000.
No Sales of Similar Securities
We, our executive officers and directors and the holders of substantially all of our outstanding shares of common stock have entered into lock-up agreements with the underwriters. Under these agreements, we and each of these persons may not, without the prior written approval of Morgan StanleyBMO Capital Markets Corp., Goldman Sachs & Co. LLC and RBC Capital Markets, LLC, offer, sell, contract to sell, pledge, or otherwise dispose of, directly or indirectly, or hedge our common stock or securities convertible into or exchangeable or exercisable for our common stock. These restrictions will be in effect for a period of 180 days after the date of this prospectus, which period is subject to extension in the circumstances described in the paragraph below.prospectus. At any time, and without public notice, Morgan StanleyBMO Capital Markets Corp., Goldman Sachs & Co. LLC and RBC Capital Markets, LLC may, in itstheir sole discretion, release some or all the securities from these lock-up agreements.
The lock-up agreement does not apply to the following transactions by us: (1) issuances of common stock upon the exercise of options (or granting or vesting of other equity incentive awards) or warrants, if any, disclosed as outstanding elsewhere in this prospectus; (2) the issuance of employee
stock options (or other equity incentive awards) and subsequent issuances of common stock upon the exercise of options (or granting or vesting of other equity incentive awards) pursuant to equity incentive plans described elsewhere in this prospectus; (3) the filing of a registration statement on Form S-8 relating to the offering of securities in accordance with the terms of equity incentive plans described elsewhere in this prospectus; and (4) the issuance of common stock in connection with one or more acquisitions by the Company of,us, or joint ventures between the Companyus and, another company, or pursuant to equipment leasing arrangements, debt financings or settlement agreements by the Company,us, provided that the aggregate number of shares of common stock that may be issued pursuant to clause (4) shall not exceed 10% of the total number of shares of common stock outstanding after the completion of this offering and each recipient of shares of common stock issued pursuant to clause (4) agrees to be bound by the terms of a lock-up agreement.agreement; (5) the distribution of all of our equity interest in SOP to its shareholders as described in this prospectus; (6) the conversion of our outstanding convertible notes into an aggregate of shares of common stock in connection with this offering as described in this prospectus; and (7) the distribution of an aggregate of share of common stock in connection with this offering to certain of our executive officers who deferred a portion of their salaries as described in this prospectus.
The lock-up agreement does not apply to the following transactions by our executive officers, directors and holders of our common stock: (1) bona fide gifts; (2) dispositions to any trust for the direct or indirect benefit of the transferor or the transferor’stransferor's immediate family; (3) transfers to a wholly-owned subsidiary of the transferor or to direct or indirect stockholders,shareholders, members, partners or other affiliates of the transferor, provided that the transfer does not involve a disposition for value; (4) transfers by operation of law, such as the rules of intestate succession; (5) dispositions of common stock acquired in this offering (other than any issuer-directed shares purchased in this offering by our directors or officers) or in open-market transactions after the completion of this
offering; (6) transfers to any corporation, partnership or other business entity with whom the transferor shares in common an investment manager or adviser; and (7) the establishment of a trading plan pursuant to Rule 10b5-1 under the Exchange Act for the transfer of common stock, provided that such plan does not permit the transfer or other disposition of common stock during the lock-up period.period; and (8) transfers pursuant to a bona fide third-party tender offer, merger, consolidation or other similar transaction involving a change of control. In the case of clauses (1), (2), (3), (4) and (6) above, the transferee must also agree to be bound by the terms of a lock-up agreement.
We have agreed to indemnify the several underwriters against certain liabilities, including certain liabilities under the U.S. Securities Act. If we are unable to provide this indemnification, we have agreed to contribute to payments the underwriters may be required to make in respect of those liabilities.
New York Stock ExchangeExchanges
We intendhave applied to apply to havelist our common stock approved for listing on the New York Stock ExchangeNYSE and the TSX under the symbol “SSMC.”"GATO." The listing will be subject to us fulfilling all of the listing requirements of the New York Stock Exchange.NYSE and the TSX.
We have applied to list our common stock on the Toronto Stock Exchange under the symbol “SM.” The listing will be subject to us fulfilling all of the listing requirements of the Toronto Stock Exchange.
Price Stabilization, Short Positions
In connection with this offering, the underwriters may engage in activities that stabilize, maintain or otherwise affect the price of our common stock during and after this offering, including:
Stabilizing transactions consist of bids or purchases made for the purpose of preventing or retarding a decline in the market price of our common stock. These transactions may also include making short sales of our common stock, which involve the sale by the underwriters of a greater number of shares of common stock than they are required to purchase in this offering. Short sales may be “covered"covered short sales,”" which are short positions in an amount not greater than the underwriters’underwriters' over-allotment option referred to above, or may be “naked"naked short sales,”" which are short positions in excess of that amount.
The underwriters may close out any covered short position by either exercising their over-allotment option, in whole or in part, or by purchasing shares in the open market. In making this determination, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option.
The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market that could adversely affect investors who purchased in this offering. Any naked short position would form part of the underwriters’ overallocationunderwriters' over-allocation position.
The underwriters also may impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of that underwriter in stabilizing or short covering transactions.
As a result of these activities, the price of our common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued by the underwriters at any time. The underwriters may carry out these transactions on the New York Stock Exchange,NYSE, the Toronto Stock Exchange,TSX, other stock exchanges, in the over-the-counter market or otherwise. Neither we nor the underwriters make any representation or prediction as to the effect that the transactions described above may have on the price of the shares.
Determination of Offering Price
Prior to this offering, there was no public market for our common stock. The initial public offering price will be determined by negotiation by us and the representatives of the underwriters. The principal factors to be considered in determining the initial public offering price include:
The estimated public offering price range set forth on the cover page of this preliminary prospectus is subject to change as a result of market conditions and other factors. Neither we nor the underwriters can assure investors that an active trading market will develop for our common stock or that the common stock will trade in the public market at or above the initial public offering price.
Directed Share ProgramAffiliations
At our request, the underwriters have reserved up to 5% of the common stock being offered by this prospectus for sale at the initial public offering price to our directors, officers, employees, consultants and existing stockholders and other persons having a relationship with us, such as suppliers, or having a relationship with our existing stockholders. The sales will be made by Morgan Stanley Smith Barney, a selected dealer affiliated with Morgan Stanley & Co. LLC, an underwriter of this offering, through a directed share program. We do not know if these persons will choose to purchase all or any portion of these reserved shares, but any purchases they do make will reduce the number of shares available to the general public. Any shares sold in the directed share program to our directors and executive officers will be subject to the lock-up agreements described above. Any shares sold through the directed share program to individuals other than our directors and executive officers for an aggregate purchase price greater than $1,000,000 will be subject to a 25 day lock-up and will reduce the number of shares freely tradable following this offering. See “Shares Eligible for Future Sale.”
Affiliations
The underwriters and their respective affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, investment research, principal investment, hedging, financing and brokerage activities.
The underwriters and their affiliates may from time to time in the future engage with us and perform services for us in the ordinary course of their business for which they will receive customary fees and expenses. In the ordinary course of their various business activities, the underwriters and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers, and such investment and securities activities may involve securities and/or instruments of us. The underwriters and their respective affiliates may also make investment recommendations and/or publish or express independent research views in respect of these securities or instruments and may at any time hold, or recommend to clients that they acquire, long and/or short positions in these securities and instruments.
At our request, the underwriters have reserved up to % of the shares of common stock offered by this prospectus, for sale, at the initial public offering price, to our employees and directors and to friends, professional contacts and family members of our employees and directors. If purchased by these persons, these shares will not be subject to a lock-up restriction, except in the case of shares purchased by any director or officer, which will be subject to a 180-day lock-up restriction described above. The sales will be made at our direction by through a directed share program. The number of shares available for sale to the general public will be reduced by the number of reserved shares sold to these individuals. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same terms as the other shares offered by this prospectus. We have agreed to indemnify the underwriters against certain liabilities and expenses, including liabilities under the Securities Act, in connection with the sales of the shares reserved for the directed share program.
Notice to prospective investors in the European Economic Area and the United Kingdom
In relation to each member stateMember State of the European Economic Area (each a "Member State") and, until the expiry of the period during which the United Kingdom continues to be subject to European Union law without being a Member State (the "Transition Period"), the United Kingdom, no shares of our common stock have been offered or will be offered pursuant to the offering to the public in that Member State or the United Kingdom prior to the publication of a prospectus in relation to the shares which has implementedbeen approved by the competent authority in that Member State or the United Kingdom or, where appropriate, approved in another Member State or the United Kingdom and notified to the competent authority in that Member State or the United Kingdom, all in accordance with the Prospectus Directive (each, a relevant member state)Regulation), other than Germany, with effect from and including the date on which the Prospectus Directive is implemented inexcept that relevant member state (the relevant implementation date), an offeroffers of securities described in this prospectusshares may not be made to the public in that relevant member state other than:Member State or the United Kingdom at any time under the following exemptions under the Prospectus Regulation:
by the underwriters
provided that no such offer of securitiesshares of our common stock shall requireresult in a requirement for the publication by us or any underwriter to publishof a prospectus pursuant to Article 3 of the Prospectus Directive.Regulation or supplement a prospectus pursuant to Article 23 of the Prospectus Regulation.
For the purposes of this provision, the expression an “offer of securities"offer to the public”public" in relation to any shares of our common stock in any relevant member stateRelevant State means the communication in any form and by any means of sufficient information on the terms of the offer and the securitiesany shares of our common stock to be offered so as to enable an investor to decide to purchase or subscribe for the securities, as the expression may be varied in that member state by any measure implementing the Prospectus Directive in that member state,shares of our common stock, and the expression “Prospectus Directive”"Prospectus Regulation" means Directive 2003/71/EC (and amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the relevant member state), and includes any relevant implementing measure in the relevant member state. The expression 2010 PD Amending Directive means Directive 2010/73/EU.
We have not authorized and do not authorize the making of any offer of securities through any financial intermediary on our behalf, other than offers made by the underwriters with a view to the final placement of the securities as contemplated in this prospectus. Accordingly, no purchaser of the securities, other than the underwriters, is authorized to make any further offer of the securities on behalf of us or the underwriters.
The EEA selling restriction is in addition to any other selling restrictions set out in this prospectus.Regulation (EU) 2017/1129.
Notice to prospective investors in Australia
This prospectus is not a formal disclosure No placement document, and has not been, nor will be, lodged with the Australian Securities and Investments Commission. It does not purport to contain all information that an investor or their professional advisers would expect to find in a prospectus or other disclosure document (as defined in the Corporations Act 2001 (Australia)) for the purposes of Part 6D.2 of the Corporations Act 2001 (Australia) or in a product disclosure statement for the purposes of Part 7.9 of the Corporations Act 2001 (Australia), in either case, in relation to the common stock.
The common stock is not being offered in Australia to “retail clients” as defined in sections 761G and 761GA of the Corporations Act 2001 (Australia). This offering is being made in Australia solely to “wholesale clients” for the purposes of section 761G of the Corporations Act 2001 (Australia) and, as such, no prospectus, product disclosure statement or other disclosure document has been lodged with the Australian Securities and Investments Commission in relation to the common stock has been, or will be, prepared.
offering. This prospectus does not constitute ana prospectus, product disclosure statement or other disclosure document under the Corporations Act, and does not purport to include the information required for a prospectus, product disclosure statement or other disclosure document under the Corporations Act.
Any offer in Australia other than to wholesale clients. By submitting an application forof the shares of our common stock you represent and warrantmay only be made to us that youpersons, or to the Exempt Investors, who are a wholesale client for"sophisticated investors" (within the purposesmeaning of section 761G708(8) of the Corporations Act), "professional investors" (within the meaning of section 708(11) of the Corporations Act) or otherwise pursuant to one or more exemptions contained in section 708 of the Corporations Act 2001 (Australia). If any recipientso that it is lawful to offer the shares of this prospectus is not a wholesale client, no offer of, or invitation to apply for, our common stock shall be deemedwithout disclosure to be made to such recipient and no applications forinvestors under Chapter 6D of the Corporations Act.
The shares of our common stock will be accepted from such recipient. Any offer to a recipientapplied for by Exempt Investors in Australia and any agreement arising from acceptance of such offer, is personal and may onlymust not be accepted byoffered for sale in Australia in the recipient. In addition, by applying for our common stock you undertake to us that, for a period of 12 months fromafter the date of issueallotment under the offering, except in circumstances where disclosure to investors under Chapter 6D of the common stock, you willCorporations Act would not transfer any interest inbe required pursuant to an exemption under section 708 of the common stock to any person in Australia other thanCorporations Act or otherwise or where the offer is pursuant to a wholesale client.disclosure document which complies with Chapter 6D of the Corporations Act. Any person acquiring shares must observe such Australian on-sale restrictions.
This prospectus contains general information only and does not take into account the investment objectives, financial situation or particular needs of any particular person. It does not contain any securities recommendations or financial product advice. Before making an investment decision, investors need to consider whether the information in this prospectus is appropriate for their needs, objectives and circumstances, and, if necessary, seek expert advice on those matters.
Notice to prospective investors in Hong Kong
Our common stock may not be offered or sold in Hong Kong by means of this prospectus or any document other than (i) to “professional investors”"professional investors" within the meaning of the Securities and Futures Ordinance (Cap.571, Laws of Hong Kong) and any rules made thereunder, or (ii) in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance (Cap.32, Laws of Hong Kong), or (iii) in other circumstances which do not result in the document being a “prospectus”"prospectus" within the meaning of the Companies Ordinance (Cap.32, Laws of Hong Kong). No advertisement, invitation or document relating to our common stock may be issued or may be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere) which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong
Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to the common stock which is or is intended to be disposed of only to persons outside Hong Kong or only to “professional investors”"professional investors" within the meaning of the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules made thereunder.
Notice to prospective investors in Japan
Our common stock has not been and will not be registered under No registration pursuant to Article 4, paragraph 1 of the Financial Instruments and Exchange Law of Japan (Law No. 25 of 1948, as amended) (the "FIEL") has been made or will be made with respect to the Financial Instruments and Exchange Law, andsolicitation of the application for the acquisition of the shares of our common stock.
Accordingly, the shares of our common stock have not been, directly or indirectly, offered or sold and will not be, directly or indirectly, offered or sold directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan (which term as used herein means any person resident in Japan, including any corporation or other entity organized under the laws of Japan), or to others for re-offering or resale,re-sale, directly or indirectly, in Japan or to, aor for the benefit of, any resident of Japan except pursuant to an exemption from the registration requirements, of, and otherwise in compliance with, the Financial InstrumentsFIEL and Exchange Law and anythe other applicable laws regulations and ministerial guidelinesregulations of Japan.
For Qualified Institutional Investors ("QII")
Please note that the solicitation for newly-issued or secondary securities (each as described in Paragraph 2, Article 4 of the FIEL) in relation to the shares of our common stock constitutes either a "QII only private placement" or a "QII only secondary distribution" (each as described in Paragraph 1, Article 23-13 of the FIEL). Disclosure regarding any such solicitation, as is otherwise prescribed in Paragraph 1, Article 4 of the FIEL, has not been made in relation to the shares of our common stock. The shares of our common stock may only be transferred to QIIs.
For Non-QII Investors
Please note that the solicitation for newly-issued or secondary securities (each as described in Paragraph 2, Article 4 of the FIEL) in relation to the shares of our common stock constitutes either a "small number private placement" or a "small number private secondary distribution" (each as is described in Paragraph 4, Article 23-13 of the FIEL). Disclosure regarding any such solicitation, as is otherwise prescribed in Paragraph 1, Article 4 of the FIEL, has not been made in relation to the shares of our common stock. The shares of our common stock may only be transferred en bloc without subdivision to a single investor.
Notice to prospective investors in Singapore
This documentprospectus has not been registered as a prospectus with the Monetary Authority of Singapore and, in Singapore, the offer and sale of our common stock is made pursuant to exemptions provided in sections 274 and 275 of the Securities and Futures Act, Chapter 289 of Singapore, or the SFA.Singapore. Accordingly, this prospectus and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of our common stockNon-CIS Securities may not be circulated or distributed, nor may our common stockthe Non-CIS Securities be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor as defined in Section 4A of the SFA pursuant tounder Section 274 of the SFA,Securities and Futures Act, Chapter 289 of Singapore (the "SFA"), (ii) to a relevant person as defined in section 275(2) of the SFA pursuant to Section 275(1) of the SFA,, or any person pursuant to Section 275(1A) of the SFA,, and in accordance with the conditions specified in
Section 275, of the SFA, or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA, in each case subject to compliance withSFA.
Where the conditions (if any) set forth in the SFA. Moreover, this document is not a prospectus as defined in the SFA. Accordingly, statutory liability under the SFA in relation to the content of prospectuses would not apply. Prospective investors in Singapore should consider carefully whether an investment in our common stock is suitable for them.
Where our common stock isNon-CIS Securities are subscribed or purchased under Section 275 of the SFA by a relevant person which is:
sharesinvestor, securities (as defined in Section 239(1) of the SFA) of that corporation or the beneficiaries’beneficiaries' rights and interest (howsoever described) in that trust shall not be transferable fortransferred within six months after that corporation or that trust has acquired the sharesNon-CIS Securities pursuant to an offer made under Section 275 of the SFA except:
In addition, investorslaw;
Singapore should note thatSecurities and Futures Act Product Classification: Solely for the common stock acquired by them is subjectpurposes of our obligations pursuant to resalesections 309B(1)(a) and transfer restrictions specified under Section 276309B(1)(c) of the SFA, we have determined, and they, therefore, should seek their own legal advice before effecting any resale or transferhereby notify all relevant persons (as defined in Section 309A of theirthe SFA), that the shares of our common stock.stock are "prescribed capital markets products" (as defined in the Securities and Futures (Capital Markets Products) Regulations 2018) and Excluded Investment Products (as defined in MAS Notice SFA 04-N12: Notice on the Sale of Investment Products and MAS Notice FAA-N16: Notice on Recommendations on Investment Products).
Notice to prospective investors in Switzerland
This prospectus doesdocument is not intended to constitute an issueoffer or solicitation to purchase or invest in the shares of our common stock described herein. The shares of our common stock may not be publicly offered, sold or advertised, directly or indirectly, in, into or from Switzerland and will not be listed on the SIX Swiss Exchange or on any other exchange or regulated trading venue in Switzerland. Neither this document nor any other offering or marketing material relating to the shares of our common stock constitutes a prospectus as such term is understood pursuant to Articlearticle 652a or Articlearticle 1156 of the Swiss Code of Obligations or a listing prospectus within the CO, and the common stock will not be listed on the SIX Swiss Exchange. Therefore, the prospectus may not comply with the disclosure standardsmeaning of the CO and/or the listing rules (including any prospectus schemes) of the SIX Swiss Exchange. Accordingly,Exchange or any other regulated trading venue in Switzerland, and neither this document nor any other offering or marketing material relating to the shares of our common stock may not be offered to the publicpublicly distributed or otherwise made publicly available in or from Switzerland, but only to a selected and limited circle of investors, which do not subscribe for the shares with a view to distribution.Switzerland.
Notice to prospective investors in the United Kingdom
This prospectus is Each underwriter has represented and agreed that:
it in connection with the issue or sale of our shares of our common stock in circumstances in which Section 21(1) of the FSMA does not apply to us; and
After the expiry of the Transition Period, no shares of our common stock have been offered or will be offered pursuant to the offering to the public in the United Kingdom prior to the publication of a prospectus in relation to the shares which has been approved by the Financial Conduct Authority in accordance with the FSMA, as amended), except that offers of shares may be made to the public in that Member State at any time under the following exemptions under the FSMA, as amended:
provided that no such offer of shares of our common stock shall require the company or the Order; or (iii) high net worth companies, and other personsrepresentative to whom it may lawfully be communicated, falling within Article 49(2)(a)publish a prospectus pursuant to (d)Section 85 of the Order (all such persons falling within (i)-(iii) together being referredFSMA or supplement a prospectus pursuant to as “relevant persons”). TheSection 87G of the FSMA.
For the purposes of this provision, the expression an "offer to the public" in relation to any shares of our common stock are only available to,in the United Kingdom the communication in any form and by any means of sufficient information on the terms of the offer and any invitation, offer or agreementshares of our common stock to subscribe,be offered so as to enable an investor to decide to purchase or otherwise acquire suchsubscribe for any shares will be engagedof our common stock.
We are, from time to time, involved in only with, relevant persons. Any person wholegal proceedings of a nature considered normal to our business. We believe that none of the litigation in which we are currently involved, or have been involved since the beginning of our most recently completed financial year, individually or in the aggregate, is not a relevant person should not actmaterial to our consolidated financial condition, cash flows or rely onresults of operations. See Note 10, "Commitments and Contingencies" in our consolidated financial statements included elsewhere in this prospectus or anyfor additional information regarding our assessment of its contents.
The validity of the issuance of the shares of common stock offered hereby will be passed upon for us by Davis Polk & Wardwell LLP, New York, New York and for the underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York. Certain matters with respect to Canadian law will be passed upon for us by Osler, Hoskin & HarcourtFasken Martineau DuMoulin LLP and for the underwriters by Stikeman Elliott LLP.
The consolidated statements of loss and comprehensive loss (not presented separately herein), shareholders’ equity (deficit) and cash flows (not presented separately herein) of Sunshine Silver Mines Corporation (formerly Los Gatos Ltd.) (an exploration stage company) for the period from April 24, 2006 (Inception) to December 31, 2009, have been audited by WithumSmith+Brown, PC, independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.
The consolidated financial statements of Sunshine Silver MinesMining & Refining Corporation as of December 31, 20122019 and 2011,2018 and for each of the years in the three-year period ended December 31, 2012, and information included in the cumulative from inception presentation for the period January 1, 2010 to December 31, 2011 (not separately presented herein),2019, have been included herein and in the registration statement in reliance upon the report of KPMG LLP, independent registered public accounting firm, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing.
The combined financial statements of the Los Gatos Joint Venture as of December 31, 2019 and 2018 and for each of the years in the three-year period ended December 31, 2019, have been included herein in reliance upon the report of KPMG LLP, independent auditors, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing.
The technical information appearing in this prospectus concerning the SunshineCerro Los Gatos Mine and the Los Gatos Project,District, including estimates of mineralized material for the Sunshine Minemineral resources and the Los Gatos Project,mineral reserves, was derived from the technical reports and mineralized material statement ofLos Gatos Technical Report prepared by Tetra Tech, MM, Inc., independent mining consultants. As of the date hereof, Tetra Tech, MM, Inc. beneficially owns none of our outstanding common shares.stock.
Information relating to our preliminary economic assessmentTable of the Sunshine Mine appearing in this prospectus was derived from the preliminary economic assessment report, included in the above referenced report pertaining to the Sunshine Mine prepared by Tetra Tech MM, Inc. and MTB Project Management Professionals, Inc. As of the date hereof, MTB Project Management Professionals, Inc. beneficially owns none of our outstanding common shares.Contents
CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
On November 19, 2010, Sunshine Silver’s Board of Directors, in contemplating an initial public offering, appointed KPMG as its independent registered public accounting firm to audit its financial statements for the fiscal year ended December 31, 2010; the financial statements for the period from April 24, 2006 (Inception) to December 31, 2009 were audited by WithumSmith + Brown, PC.
On November 19, 2010, Sunshine Silver’s Board of Directors dismissed WithumSmith + Brown, PC as Sunshine Silver’s independent registered public accounting firm for the periods subsequent to December 31, 2009. Sunshine Silver had no audit committee at such time.
The reports, dated June 29, 2011, of WithumSmith + Brown, PC on the financial statements for the period from April 24, 2006 (Inception) to December 31, 2009 contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principle.
During the years ended December 31, 2009 and 2008 and through the date hereof, there were no disagreements with WithumSmith+Brown, PC on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to WithumSmith+Brown, PC’s satisfaction, would have caused WithumSmith+Brown, PC to make reference to the subject matter in connection with its report on Sunshine Silver’s consolidated financial statements for such years, and there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K. Sunshine Silver has provided WithumSmith+Brown, PC with a copy of the foregoing statements. Attached as Exhibit 16.1 is a copy of WithumSmith+Brown, PC’s letter, dated July 7, 2011, stating its agreement with such statements.
During the fiscal years ended December 31, 2009 and 2008, we had not consulted with KPMG regarding any of the matters described in Item 304(a)(2)(i) or Item 304(a)(2)(ii) of Regulation S-K.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1, including exhibits and schedules, under the U.S. Securities Act with respect to the common stock offered hereby. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules thereto. For further information with respect to the Company and our common stock, reference is made to the registration statement and the exhibits and any schedules filed therewith.
Statements contained in this prospectus as to the contents of any contract or other document referred to are not necessarily complete and in each instance, if such contract or document is filed as an exhibit to the registration statement reference is made to the copy of such contract or other document filed as an exhibit to the registration statement, each statement being qualified in all respects by such reference. A copy
As a result of the registration statement, includingoffering, we will be required to file periodic reports and other information with the exhibits and schedules thereto, may be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, theSEC.
The SEC maintains an Internet websitesite that contains reports, proxy and information statements and other information about issuers, like us, that filewe have filed electronically with the SEC. The address of that site is www.sec.gov.
As a result of the offering, we We will becomealso be subject to the full informational requirements of the Exchange Act. We will fulfill our obligations with respectsecurities commissions in each of the provinces of Canada, other than Québec, subject to such requirements by filing periodicavailable exemptions. You are invited to read any reports, andstatements or other information, other than confidential filings, that we file with the SEC. We intend to furnish our stockholders with annual reports containing consolidated financial statements certified by an independent public accounting firm. We doCanadian provincial securities authorities. These filings are also electronically available from the Canadian System for Electronic Document Analysis and Retrieval ("SEDAR") (www.sedar.com), the Canadian equivalent of the SEC's Electronic Document Gathering and Retrieval System. Documents filed on SEDAR are not, currently maintain a website.and should not be considered, part of this prospectus.
You may find Certain terms and abbreviations used in this prospectus are defined below:
"Ag" means the following definitions helpful in your reading of this prospectus.
“Ag”ischemical symbol for the abbreviation forelement silver.
“By-Product”"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”"Concentrate"is a very fine powder-likethe product containing the valuable metalof physical concentration process, such as flotation or gravity concentration, which involves separating ore minerals from which most of theunwanted waste material inrock. Concentrates require subsequent processing (such as smelting or leaching) to break down or dissolve the ore has been eliminated.minerals and obtain the desired elements, usually metals.
“Development”"Cu" means the chemical symbol for the element copper.
"Development"is work carried out for the purpose of accessing a mineral deposit. In an underground mine, this work includes shaft sinking, crosscutting, drifting and raising. In an open pit mine, development includes the removal of over burden.
“Dewatering”"Dewatering" is the removal of water from a mine shaft or other pre-existing underground workings by pumping or drainage as a safety measure or as a preliminary step to resumption of development or operations in the area.
“Dilution”"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 ore body.
“Drilling”"Drilling"
Core: with a hollow bit with a diamond cutting rim to produce a cylindrical core that is used for geological study and assays used in mineral exploration.
In-fill: is any method of drilling intervals between existing holes, used to provide greater geological detail and to help establish reserve estimates.
“Exploration”"Exploration"is prospecting, sampling, mapping, diamond drilling and other work involved in searching for ore.
“Grade”"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 amountbasis 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 each tona rock sample, usually given as weight percent. Where extremely low concentrations are involved, the concentration may be given in grams per tonne (g/t) or tonne of ore, expressed as troy ounces per ton or(Oz/t), the grade of an ore deposit is calculated, often using sophisticated statistical procedures, as an average of the grades of a very large number of samples collected from the deposit.
"g/t" means grams per tonne for precious metals.tonne.
“Hectare”"Hectare"is a metric unit of area equal to 10,000 square meters (2.471 acres).
“masl”"Indicated Mineral Resources" or "Indicated Resources" is that part of a Mineral Resource for which quantity, grade or quality, densities, shape and physical characteristics, can be estimated with a level of confidence sufficient to allow the appropriate application of technical and economic parameters, to support mine planning and evaluation of the economic viability of the deposit. The
estimate is based on detailed and reliable exploration and testing information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes that are spaced closely enough for geological and grade continuity to be reasonably assumed.
"Inferred Mineral Resources" or "Inferred Resources" is that part of a Mineral Resource for which quantity and grade or quality can be estimated on the basis of geological evidence and limited sampling and reasonably assumed, but not verified, geological and grade continuity. The estimate is based on limited information and sampling gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes.
"Los Gatos Technical Report" means "NI 43-101 Technical Report: Los Gatos Project, Chihuahua, Mexico," prepared by Tetra Tech Inc., dated July 1, 2020, which was prepared in accordance with the requirements of the SEC Mining Modernization Rules and NI 43-101.
"masl" is meters above sea level.
“Mill”"Mineral Reserves" means the economically mineable part of a Measured or Indicated Resource demonstrated by at least a preliminary feasibility study. This study must include adequate information on mining, processing, metallurgical, economic and other relevant factors that demonstrate, at the time of reporting, that economic extraction can be justified. A Mineral Reserve includes diluting materials and allowances for losses that may occur when the material is mined.
"Mineral Resources" means a concentration or occurrence of diamonds, natural solid inorganic material, or natural solid fossilized organic material including base and precious metals, coal, and industrial minerals in or on the earth's crust in such form and quantity and of such a grade or quality that it has reasonable prospects for economic extraction. The location, quantity, grade, geological characteristics and continuity of a Mineral Resource are known, estimated or interpreted from specific geological evidence and knowledge.
"Measured Mineral Resources" is that part of a Mineral Resource for which quantity, grade or quality, densities, shape, and physical characteristics are so well established that they can be estimated with confidence sufficient to allow the appropriate application of technical and economic parameters, to support production planning and evaluation of the economic viability of the deposit. The estimate is based on detailed and reliable exploration, sampling and testing information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes that are spaced closely enough to confirm both geological and grade continuity.
"Mill"is a processing facility where ore is finely ground and thereafter undergoes physical or chemical treatments to extract the valuable metals.
“Mineralized Material”is silver bearing material that has been physically delineated"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 one or more of a number of methods, including drilling, underground work, surface trenching and other types of sampling. This material has been found to contain a sufficient amount of mineralization of an average grade of metal or metals to have economic potential that warrants further exploration evaluation. While this material is not currently or may never be classified as ore reserves, it is reported as mineralized material only if the potential exists for reclassification into the reserves category. This material cannot be classified in the reserves category until final technical, economic and legal factors have been determined. Under the SEC’s standards, a mineral deposit does not qualify as a reserve unless it can be economically and legally extracted at the time of reserve determination and it constitutes a proven or probable reserve (as defined below).Canadian Securities Administrators.
“Ore”"NSR" means Net Smelter Return: the proceeds returned from the smelter and/or refinery to the mine owner less certain costs.
"Ore"is rock, generally containing metallic or non-metallic minerals, that can be mined and processed at a profit.
“"Ore Body”Body"is a sufficiently large amount of ore that can be mined economically.
“"Ore Reserve”Reserve"is the part of a mineral deposit that could be economically and legally extracted or produced at the time of the reserve determination.
“"Pb" means the chemical symbol for the element lead.
"Probable Reserve”is aMineral Reserve" means the economically mineable part of an Indicated, and in some circumstances a mineralized depositMeasured Mineral Resource demonstrated by at least a preliminary feasibility study. This study must include adequate information on mining, processing, metallurgical, economic, and other relevant factors that can be extracted or produced economically and legallydemonstrate, at the time of reporting, that economic extraction can be justified.
"Proven Mineral Reserve" means the reserve determination. The quantity and grade and/or qualityeconomically mineable part of a probable reserve is computed fromMeasured Mineral Resource demonstrated by at least a preliminary feasibility study. This preliminary feasibility study must include adequate information similar toon mining, processing, metallurgical, economic, and other relevant factors that used for a proven reserve, but the sites for inspection, sampling and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven reserves, is high enough to assume continuity between points of observation.
“Proven Reserve”is a portion of a mineral deposit that can be extracted or produced economically and legallydemonstrate, at the time of the reserve determination. The quantity of a proven reserve is computed from dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or quality are computed from the results of detailed sampling and the sites for inspections, sampling and measurement are spaced so closely and the geologic character is so well definedreporting, that size, shape, depth and mineral content of a proven reserve is well-established.economic extraction can be justified.
“Reclamation”"Reclamation"is the process by which lands disturbed as a result of mining activity are modified to support beneficial land use. Reclamation activity may include the removal of buildings, equipment, machinery and other physical remnants of mining, closure of tailings, leach pads and other features, and contouring, covering and re-vegetation of waste rock and other disturbed areas.
“"Recovery Rate”Rate"is a term used in process metallurgy to indicate the proportion of valuable material physically recovered in the processing of ore. It is generally stated as a percentage of material recovered compared to the material originally present.
“Refining”"Refining"is the final stage of metal production in which impurities are removed from the molten metal.
“Rehabilitation”"Rehabilitation" is the restoration of an existing underground excavation to a safe condition for further exploration and development by removing obstructions, installing necessary ground support and repairing or replacing utility services such as compressed air lines, water lines, and electrical service.
“Silver”is a metallic element with minimum fineness"SEC Mining Modernization Rules" means subpart 1300 of 995 parts per 1000 parts pure silver.Regulation S-K.
“Stripping Ratio”"Smelting"is the ratio of the number of tons of waste material to the number of tons of ore extracted at an open-pit mine.intermediate stage metallurgical process in which metal is separated from impurities by using thermal or chemical separation techniques.
“Tailings”"Tailings"is the material that remains after all economically and technically recovered precious metals have been removed from the ore during processing.
“Ton”"Ton"means a short ton which is equivalent to 2,000 pounds, unless otherwise specified. We will also reference “"Tonne,”" which is a metric ton or 2,2002,204.6 pounds. “"Tonne”" is referenced under the “"Grade”" definition.
"toz" means a troy ounce.
"Waste" is rock which is not ore. Usually referred to that rock which has to be removed during the normal course of mining in order to get at the ore.
"Zn" means the chemical symbol for the element zinc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Sunshine Silver | ||||
| ||||
Report of | ||||
Consolidated Balance Sheets as of December 31, | ||||
The Los Gatos Joint Venture Combined Financial Statements | ||||
Independent Auditors' Report | F-27 | |||
Combined Balance Sheets as of December 31, 2019 and 2018 | F-28 | |||
Combined Statements of Loss for the years ended December 31, 2019 and 2018 | F-29 | |||
Combined Statements of Owner's Capital for the years ended December 31, 2019 and 2018 | F-30 | |||
Combined Statements of Cash Flows for the years ended December 31, 2019 and 2018 | F-31 | |||
Notes to the Combined Financial Statements | F-32 | |||
Sunshine Silver Mining & Refining Corporation Condensed Consolidated Financial Statements | ||||
Condensed Consolidated Balance Sheets as of June 30, 2020 and 2019 | F-45 | |||
Condensed Consolidated Statements of Loss and Comprehensive Loss for the six months ended June 30, 2020 and 2019 | F-46 | |||
Condensed Consolidated Statements of Shareholders' Equity (Deficit) for the six months ended June 30, 2020 and 2019 | F-47 | |||
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019 | F-48 | |||
Notes to the Condensed Consolidated Financial Statements | F-49 | |||
Report of Independent Registered Public Accounting Firm
TheTo the Shareholders and Board of Directors and Stockholders
Sunshine Silver MinesMining & Refining Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Sunshine Silver MinesMining & Refining Corporation (an exploration stage company)and subsidiaries (the Company) as of December 31, 20122019 and 2011, and2018, the related consolidated statements of loss and comprehensive loss, stockholders’shareholders' equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 20122019, and the information includedrelated 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 December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the cumulative from inception presentation for thethree-year period April 24, 2006 (inception) toended December 31, 2012.2019, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The cumulative consolidated statements of lossWe are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and comprehensive loss, stockholders’ equity (deficit), and cash flows for the period April 24, 2006 (inception)are required to December 31, 2012 include amounts for the period from April 24, 2006 (inception) to December 31, 2009, which were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relatesbe independent with respect to the amounts included forCompany in accordance with the period April 24, 2006 through December 31, 2009 is based solely onU.S. federal securities laws and the reportapplicable rules and regulations of other auditors.the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sunshine Silver Mines Corporation (an exploration stage company) as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2012, and for the period April 24, 2006 (inception) to December 31, 2012, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Denver, Colorado
February 22, 2013
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of Sunshine Silver Mines Corp. (formerly Los Gatos Ltd.)
We have audited the consolidated statements of loss and comprehensive loss, shareholders’ equity (deficit) and cash flows of Sunshine Silver Mines Corporation (formerly Los Gatos Ltd.) (an exploration stage company) for the period from April 24, 2006 (Inception) to December 31, 2009. The consolidated statements of loss and comprehensive loss and cash flows are not presented separately herein. The 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 audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).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. The Company is not requiredmisstatement, whether due to have, nor were we engagederror or fraud. Our audits included performing procedures to perform, an auditassess the risks of its internal control overmaterial misstatement of the consolidated financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing auditstatements, whether due to error or fraud, and performing procedures that are appropriate in the circumstances, 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. An audit also includesrespond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
| /s/ KPMG LLP | ||
We have served as the Company's auditor since 2011. Denver, Colorado June 26, 2020 |
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results
/s/ WithumSmith+Brown, PC
WithumSmith+Brown, PC
Morristown, New Jersey
June 29, 2011
SUNSHINE SILVER MINESMINING & REFINING CORPORATION
(AN EXPLORATION STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
(In thousands, except for share and per share amounts)
| | 2019 | 2018 | |||||
|---|---|---|---|---|---|---|---|
ASSETS | |||||||
Current Assets | |||||||
Cash and cash equivalents | $ | 9,085 | $ | 3,457 | |||
Materials and supplies inventory | 103 | 174 | |||||
Deferred financing costs | 1,777 | — | |||||
Related party receivables | 6,422 | 1,345 | |||||
Other current assets | 1,068 | 1,133 | |||||
| | | | | | | | |
Total current assets | 18,455 | 6,109 | |||||
Non-Current Assets | |||||||
Investment in affiliates | 105,396 | 108,172 | |||||
Metals inventory | 250 | 250 | |||||
Property, plant and equipment, net | 30,194 | 32,030 | |||||
| | | | | | | | |
Total Assets | $ | 154,295 | $ | 146,561 | |||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||
Current Liabilities | |||||||
Accounts payable and other accrued liabilities | $ | 3,465 | $ | 2,172 | |||
Non-Current Liabilities | |||||||
Reclamation obligations | 1,439 | 1,337 | |||||
Shareholders' Equity | |||||||
Common stock, $0.001 par value; 100,000,000 shares authorized; 80,646,832 and 73,902,522 shares outstanding as of December 31, 2019 and December 31, 2018 | 80 | 74 | |||||
Paid-in capital | 375,921 | 331,802 | |||||
Accumulated deficit | (225,583 | ) | (187,765 | ) | |||
Treasury stock, at cost, 289,177 shares as of December 31, 2019 and December 31, 2018 | (1,027 | ) | (1,027 | ) | |||
Unrealized loss on investments, net of tax | — | (32 | ) | ||||
| | | | | | | | |
Total shareholders' equity | 149,391 | 143,052 | |||||
| | | | | | | | |
Total Liabilities and Shareholders' Equity | $ | 154,295 | $ | 146,561 | |||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| December 31, 2012 | December 31, 2011 | |||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 59,991 | $ | 119,172 | ||||
Materials and supplies inventory | 881 | 803 | ||||||
Deferred financing costs | 2,981 | 2,189 | ||||||
Other current assets | 1,472 | 3,311 | ||||||
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| |||||
Total current assets | 65,325 | 125,475 | ||||||
Non-Current Assets: | ||||||||
Property, plant and equipment, net | 44,515 | 40,895 | ||||||
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| |||||
Total Assets | $ | 109,840 | $ | 166,370 | ||||
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| |||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current Liabilities: | ||||||||
Accounts payable and other accrued liabilities | $ | 3,768 | $ | 5,824 | ||||
Non-Current Liabilities: | ||||||||
Reclamation obligations | 862 | 801 | ||||||
Shareholders’ Equity | ||||||||
Common Stock, $0.001 par value; 100,000,000 shares authorized; shares issued and outstanding 58,810,113 as of December 31, 2012 and December 31, 2011, respectively | 59 | 59 | ||||||
Paid-in capital | 246,710 | 241,685 | ||||||
Accumulated deficit | (141,559 | ) | (81,977 | ) | ||||
Unrealized loss on investments, net of tax | 0 | (22 | ) | |||||
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| |||||
Total shareholders’ equity | 105,210 | 159,745 | ||||||
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Total Liabilities and Shareholders’ Equity | $ | 109,840 | $ | 166,370 | ||||
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See accompanying notes to the consolidated financial statements.
SUNSHINE SILVER MINESMINING & REFINING CORPORATION
(AN EXPLORATION STAGE COMPANY)
CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31,
(In thousands, except for share and per share amounts)
| | 2019 | 2018 | 2017 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
Expenses | ||||||||||
Exploration | $ | 1,248 | $ | 1,709 | $ | 1,179 | ||||
Pre-development | 2,318 | 2,527 | 2,408 | |||||||
General and administrative | 4,845 | 4,396 | 6,494 | |||||||
Amortization | 2,370 | 2,307 | 2,483 | |||||||
| | | | | | | | | | | |
Total expenses | 10,781 | 10,939 | 12,564 | |||||||
Other expense (income) | ||||||||||
Dilution loss in affiliates | 11,231 | — | — | |||||||
Equity loss in affiliates | 12,865 | 464 | 160 | |||||||
Arrangement fees | 2,988 | 283 | — | |||||||
Other expense (income) | (47 | ) | (19 | ) | 87 | |||||
| | | | | | | | | | | |
Net other expense | 27,037 | 728 | 247 | |||||||
| | | | | | | | | | | |
Loss before income taxes | 37,818 | 11,667 | 12,811 | |||||||
| | | | | | | | | | | |
Income tax benefit | — | (3 | ) | — | ||||||
| | | | | | | | | | | |
Net loss | $ | 37,818 | $ | 11,664 | $ | 12,811 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Other comprehensive (income) loss | ||||||||||
Unrealized (gain) loss on securities, net of tax | (32 | ) | (5 | ) | 25 | |||||
| | | | | | | | | | | |
Comprehensive loss | $ | 37,786 | $ | 11,659 | $ | 12,836 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Net loss per share: | ||||||||||
Basic and diluted | $ | 0.49 | $ | 0.16 | $ | 0.19 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Weighted average shares outstanding: | ||||||||||
Basic and diluted | 77,934,044 | 73,941,655 | 67,507,179 | |||||||
| 2012 | 2011 | 2010 | Period from April 24, 2006 (Inception) to December 31, 2012 | |||||||||||||
Expenses: | ||||||||||||||||
Exploration | $ | 19,142 | $ | 19,259 | $ | 14,638 | $ | 65,930 | ||||||||
Pre-development | 24,230 | 6,779 | 1,783 | 33,543 | ||||||||||||
General and administrative | 14,516 | 13,873 | 5,483 | 35,296 | ||||||||||||
Amortization | 1,938 | 1,372 | 773 | 4,090 | ||||||||||||
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| |||||||||
Total expenses | 59,826 | 41,283 | 22,677 | 138,859 | ||||||||||||
Other (income) expense: | ||||||||||||||||
Interest expense | — | 198 | 1,887 | 2,542 | ||||||||||||
Interest and other (income) expense | 23 | (36 | ) | (36 | ) | (73 | ) | |||||||||
Foreign exchange (gain) loss | (253 | ) | 275 | 40 | 275 | |||||||||||
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| |||||||||
Net other (income) expense | (230 | ) | 437 | 1,891 | 2,744 | |||||||||||
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| |||||||||
Loss before income taxes | (59,596 | ) | (41,720 | ) | (24,568 | ) | (141,603 | ) | ||||||||
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| |||||||||
Income tax benefit | 14 | — | 30 | 44 | ||||||||||||
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| |||||||||
Net loss | (59,582 | ) | (41,720 | ) | (24,538 | ) | (141,559 | ) | ||||||||
Other comprehensive loss: | ||||||||||||||||
Unrealized gain (loss) on securities, net of tax | 22 | (67 | ) | 45 | — | |||||||||||
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| |||||||||
Comprehensive loss | $ | (59,560 | ) | $ | (41,787 | ) | $ | (24,493 | ) | $ | (141,559 | ) | ||||
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| |||||||||
Net loss per share: | ||||||||||||||||
Basic and diluted | $ | (1.01 | ) | |||||||||||||
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Pro-forma basic and diluted | $ | (0.75 | ) | $ | (0.74 | ) | ||||||||||
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| |||||||||||||
Weighted-average shares outstanding: | ||||||||||||||||
Basic and diluted | 58,810,113 | |||||||||||||||
|
| |||||||||||||||
Pro-forma basic and diluted | 55,911,535 | 32,957,239 | ||||||||||||||
|
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| |||||||||||||
See accompanying notes to the consolidated financial statements.
SUNSHINE SILVER MINESMINING & REFINING CORPORATION
(AN EXPLORATION STAGE COMPANY)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’SHAREHOLDERS' EQUITY (DEFICIT)
(In thousands, except for share amounts)
| | Number | Amount | | | | | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Common Stock | Treasury Stock | Common Stock | Treasury Stock | Paid-in Capital | Accumulated Deficit | Other Comprehensive Income (Loss) | Total Shareholders' Equity | |||||||||||||||||
Balance at December 31, 2016 | 64,414,211 | 216,845 | $ | 64 | (701 | ) | $ | 284,096 | $ | (163,290 | ) | $ | (12 | ) | $ | 120,157 | |||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock-based compensation | — | — | — | — | 1,946 | — | — | 1,946 | |||||||||||||||||
Issuance of common stock | 9,483,868 | — | 10 | — | 42,668 | — | — | 42,678 | |||||||||||||||||
DSUs converted to common stock | 53,775 | — | — | — | — | — | — | — | |||||||||||||||||
Unrealized loss on investments | — | — | — | — | — | — | (25 | ) | (25 | ) | |||||||||||||||
Deferred share unit compensation | — | — | — | — | 422 | — | — | 422 | |||||||||||||||||
Other | — | — | — | — | 116 | — | — | 116 | |||||||||||||||||
Net loss | — | — | — | — | — | (12,811 | ) | — | (12,811 | ) | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2017 | 73,951,854 | 216,845 | $ | 74 | (701 | ) | $ | 329,248 | $ | (176,101 | ) | $ | (37 | ) | $ | 152,483 | |||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock-based compensation | — | — | — | — | 2,367 | — | — | 2,367 | |||||||||||||||||
Issuance of common stock | 23,000 | — | — | — | 104 | — | — | 104 | |||||||||||||||||
Unrealized gain on investments, net of tax | — | — | — | — | — | — | 5 | 5 | |||||||||||||||||
Repurchase of common stock | (72,332 | ) | 72,332 | — | (326 | ) | — | — | — | (326 | ) | ||||||||||||||
Other | — | — | — | — | 83 | — | — | 83 | |||||||||||||||||
Net loss | — | — | — | — | — | (11,664 | ) | — | (11,664 | ) | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2018 | 73,902,522 | 289,177 | $ | 74 | (1,027 | ) | $ | 331,802 | $ | (187,765 | ) | $ | (32 | ) | $ | 143,052 | |||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock-based compensation | — | — | ��� | — | 3,219 | — | — | 3,219 | |||||||||||||||||
Issuance of common stock | 6,744,310 | — | 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 | 80,646,832 | 289,177 | $ | 80 | (1,027 | ) | $ | 375,921 | $ | (225,583 | ) | $ | — | $ | 149,391 | ||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Number | Amount | Accumulated Deficit | Other Comprehensive Income (Loss) | Total | ||||||||||||||||||||||||||||||||||||
| Preferred Shares | Ordinary Shares | Common Stock | Preferred Shares | Ordinary Shares | Common Stock | Paid-in Capital | ||||||||||||||||||||||||||||||||||
Balance at April 24, 2006 (Inception) | — | — | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||
Issuance of ordinary shares | — | 12,000 | — | — | 12 | — | — | — | — | 12 | ||||||||||||||||||||||||||||||
Stock subscription receivable | — | — | — | — | (12 | ) | — | — | — | — | (12 | ) | ||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | (314 | ) | — | (314 | ) | ||||||||||||||||||||||||||||
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Balance at December 31, 2006 | — | 12,000 | — | — | — | — | (314 | ) | — | (314 | ) | |||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | (1,062 | ) | — | (1,062 | ) | ||||||||||||||||||||||||||||
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Balance at December 31, 2007 | — | 12,000 | — | — | — | — | — | (1,376 | ) | — | (1,376 | ) | ||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | (3,157 | ) | — | (3,157 | ) | ||||||||||||||||||||||||||||
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Balance at December 31, 2008 | — | 12,000 | — | — | — | — | — | (4,533 | ) | — | (4,533 | ) | ||||||||||||||||||||||||||||
Conversion of ordinary shares | 1,200,000 | (12,000 | ) | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Conversion of debt to ordinary and preferred shares | 105,416,318 | 1,383,682 | — | 1,066 | 14 | — | — | — | — | 1,080 | ||||||||||||||||||||||||||||||
Sale of ordinary shares | — | 11,425,956 | — | — | 114 | — | — | — | — | 114 | ||||||||||||||||||||||||||||||
Stock-based payment | — | 18,997,933 | — | — | 190 | — | — | — | — | 190 | ||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | — | — | 65 | — | — | 65 | ||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | (11,186 | ) | — | (11,186 | ) | ||||||||||||||||||||||||||||
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Balance at December 31, 2009 | 106,616,318 | 31,807,571 | — | 1,066 | 318 | — | 65 | (15,719 | ) | — | (14,270 | ) | ||||||||||||||||||||||||||||
Issuance of ordinary shares | — | 15,109,176 | — | — | 151 | — | 5,297 | — | — | 5,448 | ||||||||||||||||||||||||||||||
Contribution of capital | — | — | — | — | — | — | 35,978 | — | — | 35,978 | ||||||||||||||||||||||||||||||
Unrealized gains on investments, net of tax | — | — | — | — | — | — | — | — | 45 | 45 | ||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | (24,538 | ) | — | (24,538 | ) | ||||||||||||||||||||||||||||
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Balance at December 31, 2010 | 106,616,318 | 46,916,747 | — | 1,066 | 469 | — | 41,340 | (40,257 | ) | 45 | 2,663 | |||||||||||||||||||||||||||||
Issuance of preferred shares | 14,542,512 | — | — | 146 | — | — | 31,052 | — | — | 31,198 | ||||||||||||||||||||||||||||||
Contribution of capital | — | — | — | — | — | — | 1,000 | — | — | 1,000 | ||||||||||||||||||||||||||||||
Issuance of common stock on conversion of capital contributions | — | — | 20,000,000 | — | — | 20 | (20 | ) | — | — | — | |||||||||||||||||||||||||||||
Conversion of ordinary and preferred shares into common stock | (121,158,830 | ) | (46,916,747 | ) | 26,080,836 | (1,212 | ) | (469 | ) | 26 | 1,655 | — | — | — | ||||||||||||||||||||||||||
Issuance of common stock | — | — | 12,729,277 | — | — | 13 | 165,776 | — | — | 165,789 | ||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | — | — | 882 | — | — | 882 | ||||||||||||||||||||||||||||||
Unrealized losses on investments | — | — | — | — | — | — | — | — | (67 | ) | (67 | ) | ||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | (41,720 | ) | — | (41,720 | ) | ||||||||||||||||||||||||||||
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Balance at December 31, 2011 | — | — | 58,810,113 | — | — | 59 | 241,685 | (81,977 | ) | (22 | ) | 159,745 | ||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | — | — | 5,025 | — | — | 5,025 | ||||||||||||||||||||||||||||||
Unrealized gains on investments, net of tax | — | — | — | — | — | — | — | — | 22 | 22 | ||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | (59,582 | ) | — | (59,582 | ) | ||||||||||||||||||||||||||||
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Balance at December 31, 2012 | — | — | 58,810,113 | $ | — | $ | — | $ | 59 | $ | 246,710 | $ | (141,559 | ) | $ | — | $ | 105,210 | ||||||||||||||||||||||
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See accompanying notes to the consolidated financial statements.
SUNSHINE SILVER MINESMINING & REFINING CORPORATION
(AN EXPLORATION STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(In thousands)
| | 2019 | 2018 | 2017 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
OPERATING ACTIVITIES | ||||||||||
Net loss | $ | (37,818 | ) | $ | (11,664 | ) | $ | (12,811 | ) | |
Adjustments to reconcile net loss to net cash used by operating activities: | ||||||||||
Amortization | 2,370 | 2,290 | 2,483 | |||||||
Dilution loss in affiliates | 11,231 | — | — | |||||||
Stock compensation expense | 3,219 | 2,392 | 1,981 | |||||||
Equity loss in affiliates | 12,865 | 464 | 160 | |||||||
Accretion expense | 102 | 95 | 88 | |||||||
Other | 63 | 18 | — | |||||||
Changes in operating assets and liabilities: | ||||||||||
Receivables from related-party | (5,078 | ) | (145 | ) | (383 | ) | ||||
Accounts payable and other accrued liabilities | 645 | (105 | ) | 186 | ||||||
Materials and supplies inventory | 67 | 1 | 54 | |||||||
Other current assets | 39 | — | 38 | |||||||
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Net cash used by operating activities | (12,295 | ) | (6,654 | ) | (8,204 | ) | ||||
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INVESTING ACTIVITIES | ||||||||||
Purchase of property, plant and equipment | (534 | ) | (83 | ) | (330 | ) | ||||
Investment in affiliates | (21,371 | ) | (662 | ) | (28,225 | ) | ||||
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Net cash used by investing activities | (21,905 | ) | (745 | ) | (28,555 | ) | ||||
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FINANCING ACTIVITIES | ||||||||||
Issuance of common stock | 40,465 | 104 | 42,678 | |||||||
Deferred financing costs | (637 | ) | — | — | ||||||
Repurchase of common stock | — | (326 | ) | — | ||||||
| | | | | | | | | | | |
Net cash provided (used) by financing activities | 39,828 | (222 | ) | 42,678 | ||||||
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Net increase (decrease) in cash and cash equivalents | 5,628 | (7,621 | ) | 5,919 | ||||||
Cash and cash equivalents, beginning of period | 3,457 | 11,078 | 5,159 | |||||||
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Cash and cash equivalents, end of period | $ | 9,085 | $ | 3,457 | $ | 11,078 | ||||
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Supplemental disclosure of noncash transactions: | ||||||||||
Conversion of compensation into deferred share units | $ | 491 | $ | — | $ | 422 | ||||
Property, plant and equipment included in accrued liabilties | $ | — | $ | (12 | ) | $ | 12 | |||
Deferred financing costs included in accrued liabilties | $ | 1,139 | $ | — | $ | — | ||||
| Period from April 24, 2006 (Inception) to December 31, | ||||||||||||||||
| 2012 | 2011 | 2010 | 2012 | |||||||||||||
OPERATING ACTIVITIES: | ||||||||||||||||
Net loss | $ | (59,582 | ) | $ | (41,720 | ) | $ | (24,538 | ) | $ | (141,559 | ) | ||||
Adjustments to reconcile net loss to net cash used by operating activities: | ||||||||||||||||
Amortization | 1,938 | 1,372 | 773 | 4,089 | ||||||||||||
Loss on disposal of assets | 62 | 7 | 21 | 90 | ||||||||||||
Stock issuance in payment for services rendered | — | — | 70 | 325 | ||||||||||||
Accretion expense | 61 | 73 | 55 | 189 | ||||||||||||
Income tax benefit | (14 | ) | (30 | ) | (44 | ) | ||||||||||
Stock compensation expense | 5,025 | 882 | — | 5,907 | ||||||||||||
Other | 35 | — | — | 35 | ||||||||||||
Changes in operating assets and liabilities: | — | |||||||||||||||
Other current assets | 1,276 | (1,468 | ) | 33 | (1,246 | ) | ||||||||||
Receivables from related-party | 51 | (21 | ) | (30 | ) | 0 | ||||||||||
Accounts payable and other accrued liabilities | (1,835 | ) | 4,069 | 326 | 3,412 | |||||||||||
Accrued interest on long-term debt to related-party | — | — | 1,887 | 2,344 | ||||||||||||
Materials and supplies inventory | (78 | ) | (24 | ) | (16 | ) | (118 | ) | ||||||||
Payable to related-party | (48 | ) | 39 | (30 | ) | (86 | ) | |||||||||
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Net cash used by operating activities | (53,109 | ) | (36,791 | ) | (21,479 | ) | (126,662 | ) | ||||||||
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INVESTING ACTIVITIES: | ||||||||||||||||
Purchase of property, plant and equipment | (5,254 | ) | (12,182 | ) | (1,580 | ) | (19,052 | ) | ||||||||
Acquisitions, net | — | — | (29,250 | ) | (29,250 | ) | ||||||||||
Transfers to restricted cash | — | (150 | ) | (26 | ) | (176 | ) | |||||||||
Other | 22 | (2 | ) | — | 20 | |||||||||||
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Net cash used by investing activities | (5,232 | ) | (12,334 | ) | (30,856 | ) | (48,458 | ) | ||||||||
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FINANCING ACTIVITIES: | ||||||||||||||||
Capital contributions | — | 1,000 | 35,978 | 36,978 | ||||||||||||
Stock subscription receivables | — | — | 114 | 114 | ||||||||||||
Issuance of common stock | — | 165,789 | 165,789 | |||||||||||||
Deferred financing costs | (840 | ) | (1,663 | ) | (2,503 | ) | ||||||||||
Contingent consideration | — | (465 | ) | — | (465 | ) | ||||||||||
Related-party debt | — | — | 18,500 | 35,198 | ||||||||||||
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Net cash (used by) provided by financing activities | (840 | ) | 164,661 | 54,592 | 235,111 | |||||||||||
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Net increase (decrease) in cash and cash equivalents | (59,181 | ) | 115,536 | 2,257 | 59,991 | |||||||||||
Cash and cash equivalents, beginning of period | 119,172 | 3,636 | 1,379 | — | ||||||||||||
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Cash and cash equivalents, end of period | $ | 59,991 | $ | 119,172 | $ | 3,636 | $ | 59,991 | ||||||||
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See accompanying notes to the consolidated financial statements.
SUNSHINE SILVER MINESMINING & REFINING CORPORATION
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share, per share, option and optionstock unit amounts)
1. Description of Business and Basis of Preparation of Financial Statements
These financial statements represent the condensed consolidated financial position and results of operations of Sunshine Silver MinesMining & Refining Corporation and its subsidiaries (“("Sunshine Silver”Silver" or “the Company”"the Company"). Unless the context otherwise requires, references to Sunshine Silver or the Company mean the Sunshine Silver Mines Corporation and its consolidated subsidiaries.
On March 1, 2011, the investors in the Sunshine Silver predecessor entities individually and collectively combined the predecessor entities, which had been previously operated and reported as companies under common control. The predecessor Sunshine mine (“Predecessor Sunshine”) and Los Gatos Ltd. (“Los Gatos”) entities believed a combination of the two entities to consolidate their strategic land positions in the United States and Mexico, respectively, would position Sunshine Silver to become a significant competitor in the silver market. This transaction was reported for accounting purposes as a combination of companies under common control. In accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), common control exists between the Predecessor Sunshine and Los Gatos entities as both entities were primarily owned by certain trusts under the control of one individual. In accordance with U.S. GAAP, all financial reports have been prepared as if the combination of the companies under common control occurred prior to the earliest period presented, and certain amounts have been reclassified to conform to the combined presentation.
The consolidated financial statements herein refer to the consolidated and combined financial statements of Sunshine Silver’s Predecessor Sunshine and Los Gatos. The 2010 information represents the combined financial position and results of operations of Predecessor Sunshine and Los Gatos. The 2011 information represents the combined results of operations of the predecessor entities through February 28, 2011; subsequent to this date, the financial results represent the consolidated financial information for Sunshine Silver.
Sunshine Silver
Predecessor Sunshine was formed as Precious Metals Opportunities LLC (“Precious Metals”), a Delaware limited liability company. On February 2, 2011, Precious Metals converted to a Delaware corporation, and became Sunshine Silver. The Company specializes in investing in or acquiring, exploring, and developing assets in the mining industry.
United States—Sunshine Complex
On May 11, 2010, Predecessor Sunshinethe Company purchased the net assets of the Idaho Sunshine Mine from Sterling MiningMine. On October 10, 2013, the Company (“Sterling”purchased the Sunshine Big Creek Refinery ("Refinery"), through its wholly-owned subsidiary, Silver Opportunity Partners LLC, (“SOP”) a Delaware limited liability company.. The Sunshine Mine is currently undergoingand the Refinery comprise the vertically integrated, Sunshine Complex. The Company has conducted an advanced exploration drilling program improving theand a program to improve certain mining infrastructure and maintainingat the Sunshine mine facility. In addition,Complex. The Sunshine Complex is currently on care and maintenance, with a continued but reduced program of infrastructure improvement. A Sunshine Complex preliminary economic assessment technical report was recently completed for the Sunshine mine.in December 2012, and subsequently updated in January 2020.
Mexico—Los Gatos Project
Los Gatos was incorporated as a “shelf” holding company under the laws of Bermuda on April 24, 2006 for the purpose of coordinating the activities of subsidiaries exploring for deposits of precious and related metals and was substantially owned by CGT Management Ltd. (a limited liability company incorporated in Bermuda) (“CGT”). The Company intends to realize value from its Los Gatos exploration portfolio over time through selective exploration/development, sale or joint ventures with third parties, as determined from time to time. The Company’sCompany's primary Mexico exploration efforts are focused on the advancementoperation of the Los Gatos Joint Venture ("LGJV") in Chihuahua Mexico with its joint venture partner, Dowa Metals and Mining Co., Ltd. ("Dowa"), which commenced production on September 1, 2019. As of December 31, 2019, the LGJV ownership is 51.5% SSMRC and 48.5% Dowa.
On January 1, 2015, the Company entered into the LGJV to develop the Los Gatos project in northern Mexico, through("LGP") with Dowa. The LGJV operating entities consist of Minera Plata Real S. de R.L. de C.V. (“MPR”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. (collectively the "LGJV Entities"). The LGJV completed an advanced definitional drilling and decline development program in 2016 and completed a wholly-owned subsidiaryfeasibility study in January 2017. Dowa completed its $50,000 funding requirement on April 1, 2016; thereby initially acquiring a 30% interest in the LGJV and the right to purchase future zinc-concentrate production at market rates.
In July 2017, the LGJV entered into a loan agreement (the "Term Loan") with Dowa whereby the LGJV could borrow up to $210,000 for LGP development, with a maturity date of December 29, 2027. Interest on the Term Loan accrues daily at LIBOR plus 2.35%, but the interest is added to the amount borrowed for repayment monthly until December 29, 2019. During 2018, the LGJV paid Dowa a $4,200 closing fee. Commencing June 30, 2021, 14 consecutive semi-annual equal payments of the Company.
In January 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 LGP development. Interest on this loan accrues daily at LIBOR plus 1.5% and is added to the amount borrowed. As of December 31, 2018, the LGJV had $67,800 outstanding, including $2,100 of interest, under the Dowa MPR Loan. In May 2019, the Company contributed $18,200 to the LGJV to provide funding for a partial repayment of
SUNSHINE SILVER MINESMINING & REFINING CORPORATION
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share, option and optionstock unit amounts)
principal and interest related to the Dowa MPR Loan. In May 2019, the Dowa MPR Loan was fully extinguished with a principal and interest payment of $18,200 and the conversion of the remaining principal and interest of $50,737 to additional Dowa ownership in the LGJV entities. Due to the natureLGJV ownership dilution, the Company recognized a dilution loss on affiliates of $11,231 in May 2019. Subsequent to this transaction the ownership of the Company’s activitiesLGJV entities is 51.5% SSMRC and 48.5% Dowa.
As of December 31, 2019, the LGJV had $60,000 of principal and $8 of interest due under a working capital facility agreement ("WCF") entered into with Dowa in May 2019. The WCF bears interest at LIBOR plus 3.0% and matures June 28, 2021. The LGJV paid interest of $1,419 under this facility for the Sunshine Mine and Los Gatos exploration projects ityear ended December 31, 2019. SSMRC is deemeda 70% guarantor of the WCF should the LGJV be unable to be an exploration stage company.meet its obligations under this loan agreement.
During 2019 and 2018, the LGJV entered into various 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. SSMRC has guaranteed the payment of all obligations, including accrued interest, under the equipment loan agreements.
Mexico—Exploration
The Company's other regional Mexico exploration efforts are conducted through its wholly-owned subsidiary, Minera Luz del Sol S. de R.L. de C.V. ("MLS").
Liquidity
The Company has a history of operating losses and cash outflows from operations which are both expected to continue. Based on the Company's current cash flow forecasts, there is an expected cash shortfall within one year of the issuance date of the financial statements. As a result, the Company received a financial support commitment for $18,000 from its primary shareholder, Electrum Silver US LLC, to ensure the Company is able to satisfy its obligations as a going concern through June 26, 2021. The Company will need to raise additional funds through the issuance of debt or equity to refinance or otherwise retire obligations, or to satisfy the guarantee of the LGJV WCF, as they come due after June 26, 2021. The ability to raise capital is dependent on certain matters that are outside of the Company's control, and it may not be successful in raising sufficient funds, which could lead to an event of default.
2. Summary of Significant Accounting Policies
Basis of consolidation and combination
Predecessor Sunshine and Los Gatos All Company subsidiaries are consolidated as discussed in note 1.consolidated. All significant intercompany balances and transactions have been eliminated.
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. Equity method investments are
SUNSHINE SILVER MINING & REFINING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share, option and stock unit amounts)
2. Summary of Significant Accounting Policies (Continued)
reviewed periodically for 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 incurs 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 in conformity with U.S. 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 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; 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 intoto 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 computationstatement of net loss. Non-monetary assets and liabilities are translated at historical exchange rates. Expenses and other income and expense items denominated in foreign currencies are translated into U.S. dollars at average exchange rates, except for amortization which is translated at historical exchange rates.
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 in other current assets, consists of cash and investments which are held as collateral for a letter of credit and other extensions of credit. Restricted cash is included in other current assets.
Investments
Investment securities consist of publicly-traded equity securities. Short-term investments include investments with maturities greater than three months, but not exceeding 12 months. Long-term investments include investments with maturities greater than 12 months. The Company classifies its equity securities that have readily determinable fair values as available-for-sale securities. At December 31, 2012, the Company held $129 of short-term available for sale securities with an original cost of $85.
Available-for-sale securities are recorded at fair value. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of accumulated other comprehensive income until realized. Realized gains and losses from the sale of available-for-sale securities are determined on a specific-identification basis.
SUNSHINE SILVER MINES CORPORATION
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share and option amounts)
A decline in the market value of any available-for-sale security below cost deemed to be other than temporary results in an impairment charge in the computation of net loss. To determine if an impairment is other than temporary, the Company considers all available information relevant to the collectability of the security, including past events, current conditions, and reasonable and supportable forecasts when developing estimate of cash flows expected to be collected.
Materials and supplies inventoryand metals inventories
The Company’sCompany's materials and supplies inventories are valued at the lower of cost or market. Cost is determined using the average cost method for all inventories and includes applicable taxes and freight.inventories. The Company routinely evaluates the forecasted usage of its material and supplies to determinerecognize a provision for obsolete stock, as warranted.
The Company's metals inventory is valued at the existencelower of obsolete stock.average cost or net realizable value. Net realizable value represents the estimated future sales price of the product based on current and long-term metals prices, less the estimated costs to complete production and bring the product to a salable condition. Metals inventory that is not expected to be processed within the next 12 months is classified as a non-current asset.
Deferred financing costs
SUNSHINE SILVER MINING & REFINING CORPORATION
Deferred financing costs are recorded at costNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share, option and relate to expenses associated with the Company’s planned initial public offering. Such costs include underwriting fees, exchange filing fees, legal, accounting, and other incremental costs associated with the planned offering. These costs will be charged to equity against the gross proceeds upon consummationstock unit amounts)
2. Summary of the Company’s initial public offering or charged to expense if the offering is not consummated.Significant Accounting Policies (Continued)
Property, plant and equipment
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 an option agreement, 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 a mineral property is determined to have proven and probable reserves, subsequent development costs are capitalized to mineral properties. For acquired mineral properties the Company allocates the acquisition cost to proven and probable reserves and value beyond proven and probable reserves. When mineral properties are developed and operations commence, the Company expects capitalized costs to beare charged to operations using the units-of-production method over proven and probable reserves. Upon abandonment or sale of a mineral property, all capitalized costs relating to the specific property are written offremoved in the period abandoned or sold and a gain or loss is recognized.
Property, plant and equipment are recorded at cost. Amortization onof plant and equipment is calculated on the straight-line method over the estimated useful lives of the assets. The estimated useful lives of plant and equipment and buildings and improvements range from 10 to 20 years. The estimated useful lives of furniture, fixtures and computers range from 3three to 10 years.
Impairment of long-lived assets
Long-lived assets, such as 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 requiredrequire a long-lived asset or asset group to be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated 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
SUNSHINE SILVER MINES CORPORATION
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share and option amounts)
valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. There were no impairments recognized for the three years ended 2019.
Reclamation and remediation costs (assetAsset retirement obligations)obligations
The Company has asset retirement obligations (“ARO”("ARO") arising from regulatory requirements to perform certain property and asset retirement 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 depreciated over the asset’sasset's remaining useful life. The ARO is based on when spending for an existing environmental disturbance is expected to occur. The Company reviews, on at least an annual basis, unless otherwise deemed necessary, the reclamation obligation at each mine site.property.
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.
SUNSHINE SILVER MINING & REFINING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share, option and stock unit amounts)
2. Summary of Significant Accounting Policies (Continued)
The Company estimates grant date fair value using the Black-Scholes option-pricing model using the grant date share price, estimated amounts for volatility of the Company’sCompany's stock, the expected life of the awards, the fair value of the underlying shares, the risk-free interest rate and the expected dividend yield. The related expense is included as a component of either exploration, pre-development or general and administrative expense over the requisite service period of the award.
Net loss per share
Pro-forma basic loss per share and diluted loss per share are computed by dividing net loss available to common stockholders by the pro-forma weighted-average number of shares outstanding for respective periods presented. The stock options have been excluded from the calculation of pro-forma dilutive earnings per share as their effect would be anti-dilutive. In accordance with Financial Accounting Standards Board Accounting Standards Codification (“ASC”) earnings per share guidance, the Company has retroactively adjusted the predecessor shares and capital outstanding to common-stock equivalent shares outstanding to determine the weighted-average number of shares outstanding for the periods presented. Changes in ownership interests during any period are weighted for the portion of the period the shares were deemed outstanding. Accordingly, the Company calculated the pro-forma weighted-average number of shares, on a common-stock-equivalent shares basis, for all reporting periods based on the following:
For the year ended December 31, 2012, the basic Basic and diluted loss per share are computed by dividing the net loss available to common stockholderstockholders by the weighted-average number of common stock shares outstanding, including director share units ("DiSUs"), for the respective period presented.
SUNSHINE SILVER MINES CORPORATION
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share and option amounts)
Comprehensive loss
Comprehensive loss is defined as all changes in equity (deficit), exclusive of transactions with stockholders, such as capital investments. Comprehensive loss includes net loss and changes in certain assets and liabilities that are reported directly in equity. For the yearyears ended December 31, 20122019, 2018 and 2011, comprehensive income included2017, stock options have been excluded from the change in the market value of available for sale securities, net of tax, and is reported on the Consolidated Statements of Loss and Comprehensive Loss.dilutive earnings per share calculation as their effect would be anti-dilutive.
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. The Company records interest related to unrecognized tax benefits in interest expense and penalties in income tax expense.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation. The reclassified amounts have no impact on the Company’s previously reported financial position or results of operations.
Recently Issued Accounting Pronouncementsissued accounting standards
In May 2011,February 2016, the Financial Accounting Standards Board (“FASB”)FASB issued new authoritative guidanceASU 2016-02, "Leases," which will require lessees to providerecognize assets and liabilities for the rights and obligations created by most leases on the balance sheet. These changes become effective for the Company's fiscal year beginning January 1, 2022. The Company is still assessing the impact of the standard but does not expect there will be a consistent definition of fair valuematerial impact to the Company's financial statements.
In August 2018, ASU No. 2018-13 was issued to modify and ensure that fair value measurements and disclosure requirements are similar between GAAP and International Financial Reporting Standards. This guidance changes certain fair value measurement principles and enhancesenhance the disclosure requirements for fair value measurements. This guidanceupdate is effective forin fiscal years, including interim and annual periods, beginning after December 15, 20112019, and early adoption is applied prospectively.permitted. The Company adopted this guidance inis evaluating the first quarterrequired disclosures of 2012the standard and the adoption did not have an impact on the Company’s financial positionexpects to modify disclosures for fair value measurements upon adoption.
In December 2019, ASU No. 2019-12 was issued to simplify and results of operations.
In June 2011, the FASB issued Accounting Standards Update 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, whichenhance accounting for income taxes. This update is effective for annual reporting periodsin fiscal years, beginning after December 15, 2011. This guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. This guidance2021, and interim periods within fiscal years beginning after December 15, 2022, and early adoption is intended to increase the prominence of other comprehensive income in financial statements by requiring that such amounts be presented either in a single continuous statement of income and comprehensive income or separately in consecutive statements of income and comprehensive income.permitted. The Company adopted this guidance in the first quarteris
SUNSHINE SILVER MINESMINING & REFINING CORPORATION
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share, option and optionstock unit amounts)
On January 31, 2011, Los Gatos designated 14,542,512 unissued sharesstill assessing the impact of par value $0.01 ordinary shares (“Ordinary Share”) as par value $0.01 preferred shares (“Preferred Share”), and issued these Preferred Shares in full satisfaction of its then existing $31,000 of related-party debt and $198 of accrued interest.
On February 2, 2011, 20,000,000 shares of common stock were issuedthe standard but does not expect there will be a material impact to the Company’s owners when Precious Metals converted to a Delaware corporation and became Sunshine Silver.
On February 22, 2011, Los Gatos entered into an Agreement and Plan of Merger and Amalgamation (“Merger Plan”) with Sunshine Silver. Pursuant to the Merger Plan, on March 1, 2011, Los Gatos merged and was amalgamated with and into Sunshine Silver and the separate corporate existence of Los Gatos ceased. Each issued and outstanding Preferred Share and each issued and outstanding Ordinary Share was converted into approximately 0.15517 shares of par value $0.001 per share common stock of Sunshine Silver. The merger did not affect the shares of Sunshine Silver’s common stock existing before the merger.
In addition, as a result of the Merger Plan, existing outstanding options to purchase one share of Los Gatos Ordinary Shares were converted by operation of law into an option to purchase approximately 0.15517 shares of Sunshine Silver common stock at an exercise price of $2.32 per share.
On May 11, 2010, the Company, through its wholly owned subsidiary SOP, acquired the net assets of Sterling’s Idaho Sunshine Mine by purchase through Sterling’s bankruptcy proceedings. Included in this purchase was Sterling’s mine lease with Sunshine Precious Metals, Inc. (“SPMI”). In July 2010, SOP exercised the option in the lease to buy the Sunshine Mine and facilities from SPMI.
The Sunshine Mine is a past-producing mine. The Sunshine Mine suspended operations in 2008 and remains in a pre-development status. The mine facility includes extensive underground workings including shafts, levels, raises and ramp systems.
The total consideration paid in cash was comprised of a) $23,500 for the net assets acquired and liabilities assumed and b) $5,750 for the right, title and interest acquired from SPMI. The payment for the lease was recorded in property, plant and equipment, net in the Company’s consolidated balance sheet at acquisition date. The acquisition was accounted for as a business combination. The purchase price of $29,250 was allocated to the following assets and liabilities using the estimated fair values of assets acquired and liabilities assumed at the acquisition date:
Assets: | ||||
Receivables | $ | 147 | ||
Property, plant and equipment | 29,105 | |||
Investments | 119 | |||
Materials and supplies inventory | 763 | |||
Restricted cash | 289 | |||
|
| |||
| 30,423 | ||||
|
| |||
Liabilities: | ||||
Reclamation obligations | 708 | |||
Contingent consideration | 465 | |||
|
| |||
Net assets acquired | $ | 29,250 | ||
|
|
The estimated fair values of the reclamation obligations and the property, plant and equipment are classified as Level 3 of the fair value hierarchy as the valuations were determined based on assumptions that market
SUNSHINE SILVER MINES CORPORATIONCompany's financial statements.
(AN EXPLORATION STAGE COMPANY)3. Other Current Assets
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share and option amounts)
| | December 31, 2019 | December 31, 2018 | |||||
|---|---|---|---|---|---|---|---|
Value added tax receivable | $ | 213 | $ | 192 | |||
Restricted cash and certificate of deposit | 466 | 466 | |||||
Available for sale securities | — | 28 | |||||
Prepaid expenses | 359 | 415 | |||||
Deposits and other | 30 | 32 | |||||
| | | | | | | | |
Total other current assets | $ | 1,068 | $ | 1,133 | |||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
participants would use in the pricing of such assets and liabilities without observable inputs and little or no market activity. The fair value of the acquired current assets and current liabilities equaled their carrying amounts due to their short-term nature.
Pursuant to the acquisition of the Sunshine Mine, the Company acquired the right to purchase, or have Sterling dissolve, all of the issued and outstanding common stock of Sterling for a payment of $500, subject to the completion of the Sterling bankruptcy proceedings. The Company exercised this right in August 2011 and purchased substantially all of the issued and outstanding common stock of Sterling for $500. The Company calculated the fair value of the August 2011 payment as of the May 2010 acquisition date. A discount rate of 6.14% was determined based on a review of comparable corporate bond yields as of the acquisition date.
The results of the operations of the Sunshine Mine have been included in the Company’s consolidated statement of loss and comprehensive loss since the date of acquisition. The Company incurred $2,100 in acquisition costs related to the Sunshine mine acquisition. The Company follows the business combination accounting guidance related to acquisition-related costs and expenses these costs as incurred. The acquisition-related costs for the Sunshine Mine acquisition are included in general and administrative costs in the consolidated statement of loss and comprehensive loss for the year ended December 31, 2010.
| December 31, 2012 | December 31, 2011 | |||||||
Value added tax receivable | $ | 196 | $ | 740 | ||||
Restricted cash and certificate of deposit | 465 | 465 | ||||||
Available for sale securities | 129 | 127 | ||||||
Prepaid expenses | 407 | 1,255 | ||||||
Deposits | 140 | 606 | ||||||
Non-trade receivables | 15 | 67 | ||||||
Related-party receivable | 120 | 51 | ||||||
|
|
|
| |||||
Total other current assets | $ | 1,472 | $ | 3,311 | ||||
|
|
|
| |||||
At December 31, 2012 and 2011,2018, the Company held $129 and $127, respectively,cost basis of short-term available for sale securities with a cost basis of $85was $21.
4. Property, Plant and $119, respectively.
| December 31, 2012 | December 31, 2011 | |||||||
Mineral properties (1) | $ | 15,048 | $ | 15,048 | ||||
Plant & equipment | 11,623 | 7,647 | ||||||
Land | 13,129 | 9,925 | ||||||
Buildings & improvements | 7,214 | 9,671 | ||||||
Furniture, fixtures & computers | 1,545 | 740 | ||||||
|
|
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| |||||
Property, plant & equipment at cost | 48,559 | 43,031 | ||||||
Less accumulated amortization | (4,044 | ) | (2,136 | ) | ||||
|
|
|
| |||||
Property, plant & equipment, net | $ | 44,515 | $ | 40,895 | ||||
|
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| |||||
SUNSHINE SILVER MINES CORPORATION
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Mineral properties(1) Plant and equipment Land Buildings, infrastructure and improvements Furniture, fixtures and computers Property, plant and equipment at cost Less accumulated amortization Property, plant and equipment, net Mineral Properties The Company conducts exploration activities on patented and unpatented mining claims in the United States and under mining concessions in Mexico. The Company is required to make mineral and concession lease payments to various entities to secure the appropriate claims or surface rights. Certain of these agreements also have royalty payments that are triggered when the Company produces and sells minerals. Since no Company assets are in production, the Company is not NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except share, per share, option and stock unit amounts) 4. Property, Plant and Equipment, net (Continued) Sunshine The Company owns the Sunshine The Company is required to pay Chester Group of Mining Claims The Company leases nine patented mining claims and has a one-third interest in four other patented mining claims from the Chester Group that are adjacent to the mining claims of the Sunshine Silver Summit / Consil Mine Royalty The Company is required to pay (In thousands, except share, per share December 31,
2019 December 31,
2018 $ 18,203 $ 18,203 13,621 15,381 1,814 1,575 16,798 14,140 1,565 2,168 52,001 51,467 (21,807 ) (19,437 ) $ 30,194 $ 32,030 option amounts)6.Property, Plant and Equipment, net—Continued
probable reserves, and the mine has not yet been placed back in service.(1)No amortization is currently being recognized on the Sunshine Mine mineral properties, as the Company has not established proven and probable reserves, the mine has not yet been placed back in service, and there is no basis over which to amortize these costs. in production, there are no such instances where the Company is currently paying any royalty based on production and sales.
SUNSHINE SILVER MINING & REFINING CORPORATIONMineComplexmine,Complex, which includes patented and unpatented mining claims, surface access rights, and related infrastructure buildings and equipment. The property includes the Sunshine Mine andmine, mill and all of the proximate support buildings, including the shops, dry, assay office, mine office, warehouse, hoist house, compressor building and surface and underground equipment. The property also includes the Sunshine Refinery, ConSil Mine and mill and related infrastructure buildings and equipment.between a net smelter return ("NSR") royalty of 0% (at a silver price less than $6.00 per ounce) andto 7% (at a silver price of $10.00 and greater per ounce) net smelter return royalty, under a settlement with the US government and the Coeur d’Alened'Alene Indian tribe. This royalty covers substantially all of the property comprising the Sunshine Mine and extends outward within a one mileone-mile boundary of the property described in the settlement.mine.Mine. The 25-year lease term is for 25 years endingends February 2029 and is renewable for an additional 25 years. The lease is subject to monthly advance royalty payments until such time as a royalty of 4% on net returnsNSR or a royalty of 20% of net profits is payable. The lease also provides Chester Group with the option to acquire a 20% working interest in all ores, concentrates, metals or other mineral substances produced from the property. Chester Group may exercise this option by releasing the Company from its obligation to pay the 20% net profits royalty and by tendering an amount of cash equal to 20% of the then-current working capital fund. The Chester Claim Group lease also requires an annual payment of 50,000 shares of the Sterling’sSterling Mining Company common stock.between a NSR of 2% (at a silver price below $5.00/oz) and$5.00 per ounce) to 4% (at a silver price of $7.00/oz or higher) NSR royalty$7.00 and greater per ounce) from production of commercial minerals from certain patented and unpatented mining claims to a third party.claims. The patented and unpatented mining claims subject to this royalty surround the Silver Summit/Consil Mine.SUNSHINE SILVER MINES CORPORATION(AN EXPLORATION STAGE COMPANY)NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)(In thousands, except share, per share and option amounts)
Metropolitan Mines Mining Claims
The Company leases 2two patented and 70 unpatented mining claims from the Metropolitan Mines Corporation group (“Metropolitan”("Metropolitan") that layare located immediately to the south of the primary workings of the Sunshine Mine. The lease term is indefinite until cancelled by mutual agreement. The leases are subject to monthly advance royalty payments until such time as ore is produced from the Metropolitan property. Net proceeds, when ore is produced, are to be splitshared between Metropolitan (16% or 50%) and the Company (84% or 50%) depending upon the location of the production.
Mineral Mountain Mining Claims
The Company leases the Mineral Mountain Mining and Milling Company group of four patented mining claims that are adjacent to the mining claims of the Sunshine Mine. The 25-year lease term is for 25 years ending ends
SUNSHINE SILVER MINING & REFINING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share, option and stock unit amounts)
4. Property, Plant and Equipment, net (Continued)
February 2029 and is renewable for an additional 25 years. The lease is subject to annual advance royalty payments until such time as net profits royalties of 3% are payable. The lease also provides the claim owner with the option to acquire a 3% working interest in all ores, concentrates, metals or other mineral substances produced from the property. The claim owner may exercise this option by releasing the Company from its obligation to pay the 3% net profits royalty and by tendering an amount of cash equal to 3% of the then-current working capital fund.
Rock Creek—Idaho
The Company leases unpatented claims and a patented claim at Rock Creek, Idaho. The lease was signed on March 1, 2006, with a term of 25 years.25-year leases end in 2031. The leases are subject to monthly advance royalty payments and a 25% net profits royalty when operational. Contained within the lease is a $50 work commitment of $50 perfor every 5-year period. The Company is obligated to pay all future taxes relating to the leased property. The Company may cancel the lease with 30 days’days notification.
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 aan annual report must be filed in May of each year which coversdescribing the work accomplished on the property between January and December of the previous year.must be filed. These concessions may be cancelled without penaltiespenalty with prior notice to the Mexican government.
MPR 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 or a finder’sfinder's fee agreement, as discussed below:
La Cuesta International S.A. de C.V.—Los GatosSanta Valeria Concession
The Company is required to make semi-annual payments to obtain ownership of the concession, and is required to make a production royalty payment of 2% net smelter return on production from the Los Gatos concession (reduces to 0.5% upon all payments reaching $10,000) and 0.5% net smelter return from lands within
SUNSHINE SILVER MINES CORPORATION
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share and option amounts)
a one kilometer boundary of the Los Gatos concession. Once total payments have reached $15,000, the Los Gatos concession ownership will be transferred to the Company. During the pre-production phase, the Company is obligated to annually complete a minimum of $100 of exploration work on the concession. The agreement has no expiration date; however, the Company may terminate the agreement upon 30 day prior notice.
Grupo Factor—Paula Adorada Concession
The Company is required to make annualmonthly payments through 2013 to obtain ownership of the concession. The Company may terminate the agreement upon 30 day prior notice.
Zaragoza—Peregrina and El Pilar Concession
The Company was required to make annual payments through 2013 in order2020 to continue exploration activities and obtain ownership of the concession. The concession agreement was terminated in 2012, relieving the Company of all obligations.
Silacayoapan Concession
The Company is required to make semi-annual payments through 2014 in order to continue exploration activities and obtain ownership of the concession. The Company may terminate the agreement upon prior notice.
Los Cuates Concession
The Company is required to make semi-annual payments through August 2018 in order to continue exploration activities and obtain ownership of the concession, and is required to make a production royalty payment of 2% net smelter return on production. The Company may terminate the agreement upon prior notice.
Santa Valeria Concession
The Company is required to make annual payments through 2016 in order to continue exploration activities and obtain concession ownership,concessions, and is required to make a production royalty payment of 1% of the net smelter returnreturns on production. The Company may terminate the agreement upon prior notice.
San Jose de Minas
The Company is required to make annual payments through 2015 in order to continue exploration activities and obtain ownership of two concessions. The Company may terminate the agreement upon prior notice.
San Jose de Minas Finder’s Finder's Fee Agreement
The Company is required to make an annual production royalty payment of 1% net smelter return for any production from Company concessions covered by the San Jose de Minas Finder's Fee agreement; and, the Company is obligated to pay annually 5% of the exploration costs incurred by the Company, limited to a maximum $100 annual payment pertaining to the specified concessions. Once total payments under the agreement reach $1,000 the Company will have no other obligations under the agreement. No production has taken place since inception of the agreement. The agreement has no expiration date; however, the Company may terminate the agreement upon prior notice.
SUNSHINE SILVER MINESMINING & REFINING CORPORATION
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share, option and optionstock unit amounts)
Las Coloradas
The Company is required to make annual payments through 2017 in order to continue exploration activities and obtain ownership of internal concessions. The Company may terminate the agreement upon prior notice.
El Arco
The Company is required to make annual payments through 2016 in order to continue exploration activities and obtain ownership of internal concessions. The Company may terminate the agreement upon prior notice.
As of December 31, 2012, these2019, the Company's leases, concessions, and agreements are subject to minimum payments as summarized in the table below:
Mineral Leases, Concessions and Agreements Obligations:
| | Mineral Leases, Concessions and Agreements Obligations: | |||
|---|---|---|---|---|
2020 | $ | 322 | ||
2021 | 17 | |||
2022 | 17 | |||
2023 | 17 | |||
2024 | 17 | |||
Thereafter | 80 | |||
| | | | | |
Total | $ | 470 | ||
| | | | | |
| | | | | |
| | | | | |
2013 | $ | 745 | ||
2014 | 773 | |||
2015 | 654 | |||
2016 | 2,584 | |||
2017 | 3,408 | |||
Thereafter | 14,883 | |||
|
| |||
Total | $ | 23,047 | ||
|
|
The San Jose de Minas Finder’sFinder's Fee Agreement requires an annual payment of 5% of the exploration costs incurred by the Company, limited to a maximum annual payment of $100. This obligation has not been included in the table above as the amount of future exploration costs is unknown. Additionally, the Metropolitan Mines claim requires monthly payments of $1 until ore is produced. This obligation has not been included inis excluded from the table above as the time for commencing production is unknown.
The Company made mineral lease and concession payments of $474, $386,$434, $434 and $191,$437 for the yearyears ended December 31, 2012, 2011,2019, 2018 and 2010,2017, respectively.
5. Accounts Payable and Other Accrued Liabilities
| | December 31, 2019 | December 31, 2018 | |||||
|---|---|---|---|---|---|---|---|
Accounts payable | $ | 270 | $ | 365 | |||
Accrued expenses | 1,724 | 530 | |||||
Accrued compensation | 1,471 | 1,277 | |||||
| | | | | | | | |
Total accounts payable and other accrued liabilities | $ | 3,465 | $ | 2,172 | |||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
6. Related-Party Transactions
The Company has a related-party agreement to provide certain consulting services to Electrum USA, LLC. The Company had a receivable related to this agreement of $1 and $10 as of December 31, 2019 and 2018, respectively. Pursuant to the service agreement, the Company received $9, $47 and $50 for the years ended December 31, 2019, 2018 and 2017, respectively
| December 31, 2012 | December 31, 2011 | |||||||
Accounts payable | $ | 1,150 | $ | 1,632 | ||||
Accrued expenses | 1,414 | 2,291 | ||||||
Accrued payroll & taxes | 309 | 337 | ||||||
Payable to related-party | — | 48 | ||||||
Accrued compensation | 895 | 1,516 | ||||||
|
|
|
| |||||
Total accounts payable and other accrued liabilities | $ | 3,768 | $ | 5,824 | ||||
|
|
|
| |||||
The Company has a management agreement with the LGJV to provide certain consulting and administrative services. Pursuant to this service agreement, the LGJV paid $1,050, $3,501 and $1,378 to the Company for the years ended December 31, 2019, 2018 and 2017, respectively. The Company incurs
SUNSHINE SILVER MINESMINING & REFINING CORPORATION
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share, option and optionstock unit amounts)
Related-party Debt6. Related-Party Transactions (Continued)
certain LGJV costs that are subsequently reimbursed by the LGJV. The Company did not have any related-party debt outstandinghad a receivable related to this agreement of $4,050 and $900 as of December 31, 20122019 and 2011.
Prior to January 2011, Los Gatos maintained loan agreements with CGT that bore interest at fixed rates with maturities generally one to two years from their respective issuance together with any accrued unpaid interest thereon. On January 31, 2011, Los Gatos issued 14,542,512 Preferred Shares in full satisfaction of its then existing $31,000 of related-party debt and $198 of accrued interest.
The Company borrowed and repaid $800 in March 2011 from an affiliate, GRAT Holdings LLC (the parent of a current shareholder), for general corporate purposes.
Interest expense on the related-party debt was nil, $198, and $1,887 for the years ended December 31, 2012, 2011, and 2010,2018, respectively.
Service Agreements7. Stockholders' Equity
Los Gatos had a related-party service agreement with Tigris Financial (International) LP (“Tigris Intl”), and Silver Opportunity Partners, LLC (“SOP”), a wholly-owned subsidiary of Sunshine Silver, and Sunshine Silver had related-party service agreements with Tigris Financial Group Ltd. (“Tigris”). Tigris and Tigris Intl provide certain business and financial advice, including consulting, administrative, accounting and business development services. Effective August 1, 2011, the Los Gatos and Sunshine Silver agreements were cancelled. In addition, SOP assigned its service agreement to Sunshine Silver effective August 1, 2011. On December 31, 2011, the SOP service agreement was terminated. Effective January 1, 2012,Common Stock Transactions
During May 2019, the Company hasissued 4,166,667 common stock shares at $6.00 per share raising $25,000 in a related-party service agreement withprivate placement. During June 2019, the Company issued 77,643 common stock shares at $6.00 per share raising $465 in a private placement. During July 2019, the Company issued 2,500,000 common stock shares at $6.00 per share raising $15,000 in a private placement.
During March 2018, the Company issued 23,000 common stock shares at $4.50 per share raising $104 in a private placement.
During August 2017, the Company issued 4,483,868 common stock shares at $4.50 per share raising $20,177 in a private placement. During September 2017, the Company issued 2,777,778 common stock shares at $4.50 per share raising $12,500 in a private placement. During November 2017, the Company issued 2,222,222 common stock shares at $4.50 per share raising $10,000 in a private placement.
Stock Option Transactions
The Electrum Group LLC (“Electrum”). PursuantCompany's stock options have a contractual term of 10 years and entitle the holder to this service agreement, Electrum will provide certain consulting and administrative services. Effective July 1, 2012, the Electrum service agreement payments were indefinitely suspended, and all other terms and conditionspurchase one share of the Company's common stock. The options granted to employees have a requisite service agreement remainedperiod of four years. The options granted to non-employee directors have a requisite service period of one year.
The following table summarizes the respective vesting start dates and number of options granted to employees and directors in effect.2019, 2018 and 2017:
Recipient | Options Granted | Vesting Start Date | Grant Date | ||||
|---|---|---|---|---|---|---|---|
Employees | 25,000 | November 13, 2017 | November 13, 2017 | ||||
Employees | 965,750 | December 6, 2017 | December 6, 2017 | ||||
Directors | 155,000 | December 6, 2017 | December 6, 2017 | ||||
Employees | 10,000 | January 2, 2018 | January 2, 2018 | ||||
Employees | 1,017,000 | December 14, 2018 | May 3, 2019 | ||||
Directors | 186,000 | December 14, 2018 | May 3, 2019 | ||||
Pursuant The following assumptions were used to these service agreements,compute the Company paid $250, $1,003, and $1,000 forfair value of the year ended December 31, 2012, 2011, and 2010, respectively.options granted:
| | Grant Date | |||||||
|---|---|---|---|---|---|---|---|---|
| | Nov 2017 | Dec 2017 | Jan 2018 | May 2019 | ||||
Risk free interest rate | 2.18% | 2.18% | 2.18% | 2.38% | ||||
Dividend yield | — | — | — | — | ||||
Estimated volatility | 65.90% | 65.80% | 65.80% | 66.80% | ||||
Expected option life | 6 years | 6 years | 6 years | 6 years | ||||
Effective September 15, 2012, the Company has a related-party exploration services agreement with Electrum. Pursuant to this services agreement, the Company will provide certain consulting services. The Company has recorded a related-party receivableTable of $120 related to this agreement as of December 31, 2012.Contents
Other Related-party Transactions
Effective October 1, 2012, the Company transferred its ownership interest in Calico Exploration LLC (“Calico”) to Electrum for $336. The consideration exchanged reflected the Calico costs incurred through the effective date by the Company.
Effective March 1, 2012 the Company has a related-party office rental agreement with Tigris. The Company incurred $38 related to this agreement for the year ended December 31, 2012.
SUNSHINE SILVER MINESMINING & REFINING CORPORATION
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share, option and optionstock unit amounts)
From time to time, the Company may have receivables from or payables to other related parties under common control in the normal course of its activities. These typically represent expenditures incurred by one party but paid by another. These amounts are settled via cash payments.
Los Gatos
Ordinary and Preferred Share Transactions
On October 2, 2009, Los Gatos authorized an increase in its total capitalization to $3,000, designated all of its shares to have a $0.01 par (300,000,000 total shares at $0.01 par) and divided its share capital into shares of two classes: Ordinary Shares and Preferred Shares.
The holders of Ordinary Shares:
are entitled to one vote per share;
are entitled to such dividends as may from time to time be declared;
in the event of winding-up or dissolution of Los Gatos, whether voluntary or involuntary or for the purpose of a reorganization or otherwise or upon any distribution of capital, are entitled to the surplus assets of Los Gatos after the distribution in full of any and all capital payable in respect of the preferred shares then issued and outstanding; and
are generally entitled to enjoy all of the rights attaching such shares; and
may not transfer their shares until all of the Preferred Shares are converted into Ordinary Shares
The holders of Preferred Shares:
are entitled to one vote per share;
are entitled to such dividends as may from time to time be declared;
in the event of winding-up or dissolution of Los Gatos, whether voluntary or involuntary or for the purpose of a reorganization or otherwise or upon any distribution of capital, are entitled to payment of $0.41 per preferred share from the surplus assets of Los Gatos;
are entitled to convert each Preferred Share to an Ordinary Share at the discretion of the holder of the preferred share by delivery of written notice to the Secretary of Los Gatos; and
are generally entitled to enjoy all of the rights attaching to such shares.
Los Gatos converted its then existing 12,000 shares of $1.00 par ordinary stock to 1,200,000 Preferred Shares and designated an additional 105,416,318 of its total shares as Preferred Shares. All 106,616,318 Preferred Shares were issued to CGT in payment of the then outstanding advance of $527 and a reduction of long-term debt payable to CGT of $539. In addition, on October 2, 2009, Los Gatos issued 1,383,682 Ordinary Shares to CGT in payment of long term debt payable to CGT of $14.
During the period October 2, 2009 through December 31, 2009, Los Gatos issued 18,997,933 Ordinary Shares in payment for services, as follows: 1) 12,000,000 shares to related individuals; 2) 2,226,615 shares to
SUNSHINE SILVER MINES CORPORATION
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share and option amounts)
two vendors; and 3) 4,771,318 shares to Tigris Intl. In addition, individuals associated with various related entities purchased 11,425,956 Ordinary Shares for $114. The December 31, 2009 stock subscription receivable of $114 was paid in full on January 28, 2010.
Certain of the Ordinary Shares issued are subject to agreements which contain a purchase option by the entity (or an affiliate of the entity) at which the respective shareholder is employed or is providing services, as the case may be. In case of termination of employment or the service relationship prior to five years from the initial vesting date set forth in each shareholder’s share purchase agreement or share award agreement, the shareholder can receive from the option holder, at the option holder’s option, payment for the shares amounting to 20% of the shares owned multiplied by the number of years from the initial vesting date to a maximum of 100% at a price determined by the Company’s board of directors. The purchase option ends five years from the initial vesting date. Additionally, certain other Ordinary Shares are subject to a partial purchase option. For the third and fourth vesting years, 40% and 20% of the shares, respectively, will be subject to the purchase option. Thereafter, these shares will no longer be subject to the purchase option.
On June 30, 2010, the Company issued 174,949 Ordinary Shares for $2 to an employee of a related entity under the same terms as described above for Ordinary Shares. The Company recognized an additional $34 of expense to reflect the $0.20 fair value of the Ordinary Shares. The fair value was determined based on an enterprise value and option pricing model.
On January 31, 2011, Los Gatos designated 14,542,512 unissued Ordinary Shares as Preferred Shares. On January 31, 2011, Los Gatos issued such Preferred Shares to CGT in full satisfaction of the then existing $31,198 (principal of $31,000 and interest of $198) amounts due to CGT.
In addition, pursuant to the Merger Plan, the 6,727,561 options outstanding for the purchase of Los Gatos Ordinary Shares converted to options to purchase 1,043,938 common stock shares of Sunshine Silver at $2.32 per share on March 1, 2011.
Stock Option Transactions
On October 14, 2009, Los Gatos entered into stock option agreements with various individuals and entities that agreed to serve on its Advisory Board that provide for the purchase of 21,661,788 Ordinary Shares. These options vested on the date of the grant and had a stated exercise price of $0.36 per share expiring the earlier of October 14, 2019, or two years after an initial public offering. The stock options were valued using a Black-Scholes model. The following assumptions were used to compute the fair value of the option grants:LGJV Personnel options as of December 31, 2019, 2018 and 2017:
| | December 31, | |||||
|---|---|---|---|---|---|---|
| | 2019 | 2018 | 2017 | |||
Risk free interest rate | 1.76% | 2.55% | 2.26% | |||
Dividend yield | — | — | — | |||
Estimated volatility | 63.60% | 65.90% | 65.50% | |||
Expected option life | 6 years | 6 years | 6 years | |||
| ||||
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|
The Company’s computation of theCompany'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 Company is not publicly traded and
SUNSHINE SILVER MINES CORPORATION
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share and option amounts)
therefore does not have the 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.
For the year ended December 31, 2009, the Company recognized stock-based compensation of $65 related to these option grants. As of December 31, 2009, all 21,661,788 options were outstanding and exercisable
During the year ended December 31, 2010, there were no stock options granted.
In December 2010, options to acquire 14,934,227 Ordinary Shares were exercised by CGT, of which 14,616,139 options were acquired from an entity serving on the Advisory Board, at an exercise price of $0.36 per share resulting in $5,376 of capital contributions through reduction in related-party debt.
At December 31, 2010, 6,727,561 options with an exercise price of $0.36 per share, expiring the earlier of October 14, 2019, or two years after an initial public offering, were outstanding.
The following table is a summary of stock option activity for the years ended December 31, 2010 and 2009:
| Pre-merger | Pro-forma post-merger | |||||||||||||||
Options | Shares | Exercise Price | Shares | Exercise Price | ||||||||||||
Outstanding at December 31, 2008 | — | $ | — | — | $ | — | ||||||||||
Granted | 21,661,788 | 0.36 | 3,361,327 | 2.32 | ||||||||||||
Exercised | — | — | — | — | ||||||||||||
Forfeited or Expired | — | — | — | — | ||||||||||||
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Outstanding at December 31, 2009 | 21,661,788 | 0.36 | 3,361,327 | 2.32 | ||||||||||||
Granted | — | — | — | — | ||||||||||||
Exercised | (14,934,227 | ) | 0.36 | (2,317,389 | ) | 2.32 | ||||||||||
Forfeited or Expired | — | — | — | — | ||||||||||||
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Outstanding at December 31, 2010 | 6,727,561 | $ | 0.36 | 1,043,938 | $ | 2.32 | ||||||||||
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Sunshine Silver
Common Stock Transactions
Through January 2011, the owners of Precious Metals contributed $36,978 as capital contributions. In February 2011, these capital contributions were converted into 20,000,000 shares of common stock when Precious Metals became Sunshine Silver.
Pursuant to the Merger Plan, each issued and outstanding Ordinary Share and Preferred Share of Los Gatos was converted into approximately 0.15517 shares of Sunshine Silver’s $0.001 par value common stock.
From March 1, 2011 to June 1, 2011, investors contributed $163,733 for 20.1% of the common stock of the Company, and holders of 885,990 options exercised their right to purchase shares of Sunshine Silver stock at an exercise price of $2.32 per share resulting in proceeds of $2,056. The Company has not received any additional funding subsequent to June 1, 2011.
SUNSHINE SILVER MINES CORPORATION
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share and option amounts)
Stock Option Transactions
Los Gatos stock option activity prior to 2011 is discussed above. During the year ended December 31, 2011, the Company granted 413,600 employee stock options. These options had a contractual term of 10 years and entitled the holder to purchase one share of the Company’s common stock. The following assumptions were used to compute the fair value of the option grants on the respective grant dates:
| March 9, 2011 | May 4, 2011 | July 18, 2011 | August 8, 2011 | |||||||||||||
Risk free interest rate | 2.46 | % | 2.28 | % | 1.43 | % | 1.43 | % | ||||||||
Dividend yield | — | — | — | — | ||||||||||||
Estimated volatility | 87.23 | % | 90.06 | % | 89.75 | % | 89.75 | % | ||||||||
Expected option life | 6 years | 6 years | 6 years | 6 years | ||||||||||||
The Company’s computation of the estimated volatility was based on the historical volatility of a group of peer companies’companies' common stock over the expected option life and included both exploration stage and development stage companies. The peer information was used because the Company is not publicly traded and therefore does not have the 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.
On October 30, 2012 the Company granted 1,494,682 stock options Total unrecognized compensation expense as of December 31, 2019 was $4,477, which is expected to employees and directors and all of the options granted in 2011 were cancelled. These options havebe recognized over a contractual term of 10 years and entitle the holder to purchase one share of the Company’s common stock. The options granted to employees have a requisite serviceweighted average period of four2.4 years. A portionThe weighted-average grant-date fair value, intrinsic value of options exercised, and total stock-based compensation expense for the options granted to our non-employee directors have an immediate vesting condition,years ended December 31, 2019, 2018 and the remaining portion have a requisite service period of one year. The Company elected to amortize the unrecognized expense of the cancelled 2011 stock options and the October 2012 stock options over the requisite service period of four years.2017 are summarized as follows:
| | December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2019 | 2018 | 2017 | |||||||
Weighted-average grant-date fair value | $ | 3.69 | $ | 2.73 | $ | 2.73 | ||||
Intrinsic value of options exercised | — | — | — | |||||||
Stock based compensation expense | 3,219 | 2,392 | 1,981 | |||||||
The following table summarizestables summarize the respective vesting start dates and numberstock option activity for the years ended December 31, 2019:
Employee & Director Options | Shares | Weighted- Average Exercise Price | Aggregate Intrinsic Value | Weighted- Average Remaining Life (Years) | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Outstanding at December 31, 2018 | 6,097,309 | $ | 7.29 | $ | 2,096 | 6.22 | |||||||
Granted | 1,253,000 | $ | 6.00 | ||||||||||
Exercised | — | $ | — | ||||||||||
Forfeited | 247,948 | $ | 3.41 | ||||||||||
| | | | | | | | | | | | | | |
Outstanding at December 31, 2019 | 7,102,361 | $ | 7.20 | $ | 7,532 | 5.96 | |||||||
| | | | | | | | | | | | | | |
Vested at December 31, 2019 | 5,646,611 | $ | 7.69 | $ | 6,484 | 5.35 | |||||||
| | | | | | | | | | | | | | |
Table of options granted to employees and directors in 2012:Contents
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The following assumptions were used to compute the fair value of the October 30, 2012 options grant:
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SUNSHINE SILVER MINESMINING & REFINING CORPORATION
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share, option and optionstock unit amounts)
7. Stockholders' Equity (Continued)
LGJV Personnel Options | Shares | Weighted- Average Exercise Price | Aggregate Intrinsic Value | Weighted- Average Remaining Life (Years) | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Outstanding at December 31, 2018 | 167,082 | $ | 3.80 | $ | 117 | 7.42 | |||||||
Granted | — | $ | — | ||||||||||
Exercised | — | $ | — | ||||||||||
Forfeited | (57,892 | ) | $ | 4.02 | |||||||||
| | | | | | | | | | | | | | |
Outstanding at December 31, 2019 | 109,190 | $ | 3.68 | $ | 253 | 6.11 | |||||||
| | | | | | | | | | | | | | |
Vested at December 31, 2019 | 104,190 | $ | 3.64 | $ | 245 | 6.02 | |||||||
| | | | | | | | | | | | | | |
Director Share Unit Transactions
The Company’s computationDiSUs are awarded to Directors at the discretion of the estimated volatility was basedBoard of Directors. The DiSUs are fully vested on the historical volatilitygrant date and each DiSU entitles the holder to receive one share of a group of peer companies’the Company's common stock overupon departure from the expected option life, and included both exploration stage and development stage companies.Company. The peer information was used becauseDiSU fair value equaled the Company is not publicly traded and therefore does not have the 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 basedCompany's common stock fair value on the U.S. Treasury constant maturity yield at the date of the grant over the expected life of the option.
Total unrecognized compensation expense as of December 31, 2012 was $6,720, which is expected to be recognized over a weighted average period of 2.6 years. The weighted-average grant-date fair value, intrinsic value of options exercised, and total stock based compensation expense for the year ended December 31, 2012, 2011 and 2010 are summarized as follows:date.
| Year Ended December 31, | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
Weighted-average grant-date fair value | $ | 6.74 | $ | 11.87 | $ | 0.20 | ||||||
Intrinsic value of options exercised | — | 10,193 | — | |||||||||
Stock based compensation expense | 5,025 | 882 | 34 | |||||||||
The following table summarizes the stock option activity for the year ended December 31, 2012:
Stock Options | Shares | Weighted- Average Exercise Price | Aggregate Intrinsic Value | Weighted- Average Remaining Life (Years) | ||||||||||||
Outstanding at January 1, 2012 | 571,548 | $ | 19.72 | |||||||||||||
Cancelled—common stock options1 | (413,600 | ) | 26.36 | |||||||||||||
Granted | 1,494,682 | 13.83 | ||||||||||||||
Exercised | — | — | ||||||||||||||
Forfeited | (10,461 | ) | 13.83 | |||||||||||||
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Outstanding at December 31, 2012 | 1,642,169 | 12.72 | $ | 1,305 | 9.54 | |||||||||||
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Vested at December 31, 2012 | 593,837 | 10.77 | $ | 1,305 | 9.03 | |||||||||||
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On February 16, 2013,May 3, 2019, the Company granted 1,512,878 options at a strike price of $13.83 per share.55,963 DiSUs to Directors as compensation for director fees from September 2017 through December 2018. In 2019, the Company incurred $9 related to these fees. The Company accrued $307 related to these fees in 2018 and 2017. On September 26, 2019, the Company granted 29,098 DiSUs to Directors as compensation for director fees from January 1, 2019 through September 30, 2019. During 2019, the Company incurred $236 related to director fees. At December 31, 2019 and 2018, there were 355,215 and 270,154 DiSUs outstanding, respectively.
8. Asset Retirement Obligations
The Company recorded accretion expense related to the asset retirement obligation (“ARO”)ARO of $61, $57$102, $94 and $36,88 for the yearyears ended December 31, 2012, 2011,2019, 2018 and 2010,2017, respectively.
SUNSHINE SILVER MINES CORPORATION
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share and option amounts)
The following table summarizes activity in the Company’sCompany's ARO:
| | December 31, 2019 | December 31, 2018 | |||||
|---|---|---|---|---|---|---|---|
Balance, beginning of period | $ | 1,337 | $ | 1,243 | |||
Accretion expense | 102 | 94 | |||||
Balance, end of period | $ | 1,439 | $ | 1,337 | |||
| December 31, 2012 | December 31, 2011 | |||||||
Balance, beginning of year | $ | 801 | $ | 744 | ||||
Accretion expense | 61 | 57 | ||||||
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Balance, end of year | $ | 862 | $ | 801 | ||||
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The Company is required to provide the applicable governmental agencies with financial assurances related to its closure and reclamation obligations. At December 31, 20122019 and December 31, 2011,2018, the Company had restricted cash in the form of a certificate of deposit totaling $275 as collateral for a letter of credit issued by a financial institution as security to a certain governmental agency for the Company’sCompany's reclamation obligations.
SUNSHINE SILVER MINING & REFINING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share, option and stock unit amounts)
9. 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.
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.
Financial Assets and Liabilities
The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis at December 31, 2012 and 2011 by respective level of the fair value hierarchy:
December 31, 2012 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: Short-term available for sale securities | $ | 129 | — | — | $ | 129 | ||||||||||
December 31, 2011 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: Short-term available for sale securities | $ | 127 | — | — | $ | 127 | ||||||||||
SUNSHINE SILVER MINES CORPORATION
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share and option amounts)
The Company’s short-term available for sale securities are classified within Level 1 of the fair value hierarchy. These securities are comprised of common stock, which are valued using quoted prices in active markets. The Company did not have any Level 2 or Level 3 financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2012 and 2011.
Non-Financial Assets and Liabilities
The Company discloses and recognizes its non-financial assets and liabilities, such as ARO, at fair value on a non-recurring basis. The estimated fair value for ARO is classified as Level 3 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 liabilities without observable inputs and no market activity.
Fair Value of Other Financial Instruments
At December 31, 20122019 and 20112018 the Company’sCompany's other financial instruments consist of cash and cash equivalents, restricted cash, receivables, 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 supplemental non-cash transactions:
| Year Ended December 31, | Period from April 24, 2006 (Inception) to December 31, 2012 | |||||||||||||||
| 2012 | 2011 | 2010 | ||||||||||||||
Contingent consideration at acquisition | $ | — | $ | — | $ | 465 | $ | 465 | ||||||||
Conversion of loans & accrued, unpaid interest from related parties to equity | $ | — | 31,198 | 5,376 | 37,654 | |||||||||||
Conversion of accrued interest to debt | $ | — | — | 1,506 | 1,713 | |||||||||||
Conversion of deposits to property, plant and equipment | $ | (514 | ) | — | — | (514 | ) | |||||||||
Accrued deferred financing costs | $ | (48 | ) | 526 | — | 478 | ||||||||||
The components of loss before income taxes were as follows:
| Year Ended December 31, | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
U.S. | $ | (43,248 | ) | $ | (24,399 | ) | $ | (6,898 | ) | |||
Mexico | (16,348 | ) | (17,321 | ) | (17,670 | ) | ||||||
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Total | $ | (59,596 | ) | $ | (41,720 | ) | $ | (24,568 | ) | |||
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SUNSHINE SILVER MINES CORPORATION
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per shareNon-Financial Assets and option amounts)Liabilities
The componentsCompany discloses and recognizes its non-financial assets and liabilities, such as ARO, at fair value on a non-recurring basis. The estimated fair value for these non-financial liabilities are classified as Level 3 of the consolidated income tax benefit (provision) from continuing operations werefair value hierarchy, as follows: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.
| Year Ended December 31, | ||||||||||||||||||||||||
| 2012 U.S. | 2012 Mexico | 2011 U.S. | 2011 Mexico | 2010 U.S. | 2010 Mexico | |||||||||||||||||||
Current portion of income tax benefit | ||||||||||||||||||||||||
U.S. Federal | $ | — | $— | $ | — | $ | — | $ | — | $ | — | |||||||||||||
U.S. State | — | — | — | — | — | — | ||||||||||||||||||
Mexico | — | — | — | — | — | — | ||||||||||||||||||
Deferred portion of income tax benefit | ||||||||||||||||||||||||
U.S. Federal | $ | 12 | — | — | — | 24 | — | |||||||||||||||||
U.S. State | $ | 2 | — | — | — | 6 | — | |||||||||||||||||
Mexico | — | — | — | — | — | — | ||||||||||||||||||
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Total income tax benefit | $ | 14 | $ | — | $ | — | $ | — | $ | 30 | $ | — | ||||||||||||
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A reconciliationThe Company recorded its initial investment in affiliates at fair value. The estimated fair value for this non-financial asset is classified as Level 3 of the actual income tax benefit (provision)fair value hierarchy, as the valuation was determined based on internally developed assumptions with few observable inputs and the tax computed by applying the U.S. federal rate (35%) to the loss before income taxes is as follows:
| Year Ended December 31, | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
Tax benefit from continuing operations | $ | 20,859 | $ | 14,602 | $ | 8,599 | ||||||
State tax benefit from continuing operations | 2,631 | 2,026 | 333 | |||||||||
Nondeductible expenses | (15 | ) | (245 | ) | (2,460 | ) | ||||||
Foreign tax rate differential | — | — | (540 | ) | ||||||||
Change in valuation allowance | (27,731 | ) | (28,046 | ) | (6,803 | ) | ||||||
Effect of foreign tax rate change | — | — | 203 | |||||||||
Effect of tax rate change | (250 | ) | — | — | ||||||||
Net operating loss inflation rate adjustment | — | — | 620 | |||||||||
Foreign exchange rate differential | — | — | 78 | |||||||||
Foreign branch tax benefit | 4,520 | 11,663 | — | |||||||||
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Total income tax benefit | $ | 14 | $ | — | $ | 30 | ||||||
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The net operating loss inflation rate adjustment relates to historical net operating loss carryforwards in Mexico from 2006 to 2012. These historical carryforwards have been inflation-adjusted based upon an inflation factor published by the central bank of Mexico, as any inflationary adjustment would impact the Company’s basis in the net operating losses during the carryforward period.
SUNSHINE SILVER MINES CORPORATIONno market activity.
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share10. Commitments and option amounts)Contingencies
A summary of the components of the net deferred tax assets is as follows:
| Year Ended December 31, | ||||||||
| 2012 | 2011 | |||||||
Current deferred tax assets | ||||||||
Accrued compensation | $ | 353 | $ | 555 | ||||
Charitable contributions | 14 | — | ||||||
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Total current deferred tax assets | 367 | 555 | ||||||
Non-current deferred tax assets | ||||||||
Mineral reserves | 1,969 | 1134 | ||||||
Asset retirement obligation | 339 | 320 | ||||||
Property, plant and equipment | 343 | 204 | ||||||
Exploration | 17,703 | 6801 | ||||||
Operating loss carryforward | 19,340 | 9,586 | ||||||
Foreign branch tax benefit | 16,180 | 11,663 | ||||||
Stock options | 2,329 | 352 | ||||||
Other | 63 | 174 | ||||||
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Total non-current deferred tax assets | 58,266 | 30,234 | ||||||
Valuation allowances | (58,463 | ) | (30,732 | ) | ||||
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Total deferred tax assets | 170 | 57 | ||||||
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Current deferred tax liabilities | ||||||||
OCI gain on available for sale securities | (14 | ) | (3 | ) | ||||
Foreign exchange loss | (99 | ) | 0 | |||||
Prepaid expenses | (57 | ) | (54 | ) | ||||
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Total current deferred tax liabilities | (170 | ) | (57 | ) | ||||
Total deferred tax liabilities | (170 | ) | (57 | ) | ||||
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Net deferred income tax assets (liabilities) | $ | — | $ | — | ||||
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Based upon the level of taxable income (loss) 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 Company will not realize the benefits of these deductible differences, and thus has recorded a valuation allowance against the net deferred tax asset balance of $58,463 and $30,732 as of December 31, 2012 and 2011, respectively. If the Company is profitable for a number of years and the prospects for the realization of the deferred tax assets are more likely than not, the Company will then reverse the valuation allowance and credit income tax expense.
At December 31, 2012 the Company had $49,064 of net operating loss carryforwards in the United States expiring at various dates through 2032, and $53,491 of net operating loss carryforwards in Mexico which expire at various dates through 2022. Valuation allowances have been recorded on net operating loss carryforwards where the Company believes it is more likely than not that the net operating loss will not be realized. The Company will monitor the valuation on an ongoing basis and will make the appropriate adjustments as necessary should circumstances change.
SUNSHINE SILVER MINES CORPORATION
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share and option amounts)
The Company has adopted the provisions of ASC 740-10,Income Taxes. The Company files income tax returns in the U.S., Mexico, and Idaho. The Company’s foreign assets and operations are owned by entities that have elected to be treated for U.S. tax purposes as unincorporated branches of a U.S. holding company and, as a result, the taxable income or loss and other tax attributes of such entities are included in the Company’s U.S. federal consolidated income tax return. The statute of limitations for tax returns filed in the U.S. and Mexico is three years and five years, respectively, from the date of filing. The Company’s 2012, 2011 and 2010 U.S. tax returns are subject to examinations by U.S. tax authorities until 2016, 2015 and 2014, respectively. The Company is no longer subject to examinations by Mexico tax authorities for years prior to 2008.
As of December 31, 2012, the Company has not recognized 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 Company 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 during the periods presented.
The Company, 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
SUNSHINE SILVER MINING & REFINING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share, option and stock unit amounts)
10. Commitments and Contingencies (Continued)
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’sCompany'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.
Other Contingencies
Stonehill / Highwood Litigation
Stonehill Capital Management LLC and Highwood Partners, LP (the “Lenders”), as debtors-in-possession, or (“DIP”), lenders to Sunshine Precious Metals, Inc. (“SPMI”), a prior owner of the Sunshine Mine, have asserted a mortgage claim against certain of the property at the Sunshine Mine that the Company acquired from SPMI in June 2010. The DIP financing loan was made in connection with SPMI’s bankruptcy in 2000, in the amount of $5,000, but the Lenders claim that they were owed $71,200 as of March 31, 2011 including accrued interest and penalties, and further, that this amount continues to accrue interest at a compounded rate of 25%. Additionally, they are seeking an award of their attorneys’ fees and costs. The Company filed a complaint in the District Court of Shoshone County, Idaho, on September 23, 2010 to declare the alleged mortgage unenforceable. The Lenders filed an action before the same court to enforce the mortgage. The two actions have been
SUNSHINE SILVER MINES CORPORATION
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share and option amounts)
consolidated. Following the conclusion of pre-trial discovery, the Company and the Lenders submitted motions for summary judgment, which were argued before the court on April 17, 2012. The Court issued a written order on the motions on April 19, 2012 (the “Order”). In its Order, the Court partially denied and partially granted each party’s motions, holding that the Lenders’ mortgage was generally enforceable but that the Lenders were obligated, under a prior 2003 agreement with SPMI and certain of its affiliates, to release their mortgage and other liens upon receipt of an amount (the “Net Proceeds”) to be determined by the Court in a subsequent hearing. For the purpose of avoiding the cost and delay inherent in conducting a further hearing and to progress the case toward a final court judgment, the Parties have stipulated that the Net Proceeds owed are $2,725. At a status conference held on October 5, 2012, the Court refused the Lenders’ request to certify the Order as a final order, in light of certain remaining issues between the Lenders and another party. These issues do not involve the Company’s property. A hearing to resolve all such remaining issues was scheduled for November 7, 2012, but the parties involved engaged in settlement talks and requested an adjournment of the hearing until their settlement was complete. Following such settlement, the Court is expected to enter its final judgment after which both parties have the right to appeal the Court’s April 19, 2012 summary judgment order. A hearing to determine the possible award of attorneys’ fees and costs was held in this case on November 19, 2012, at which time the Court held that no party was entitled to its attorneys’ fees and costs. The Company intends to defend vigorously against the claims and does not believe that this matter is likely to have a material adverse effect on its operations or financial condition. Litigation is inherently unpredictable, however, and while the Company believes it has valid arguments and defenses should the matter be reviewed on appeal, there can be no assurance as to the ultimate outcome of this action.
The Company is from time to time involved in various legal proceedings related to its business. Except in the above-described proceeding, managementManagement 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’sCompany's financial condition or results of operations.
11. Income Taxes
The components of loss before income taxes were as follows:
| | Year Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2019 | 2018 | 2017 | |||||||
U.S. | $ | (35,672 | ) | $ | (9,701 | ) | $ | (11,327 | ) | |
Mexico | (2,145 | ) | (1,964 | ) | (1,484 | ) | ||||
| | | | | | | | | | | |
Total | $ | (37,817 | ) | $ | (11,665 | ) | $ | (12,811 | ) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
The consolidated income tax benefit from continuing operations consisted of nil, $3 and nil for the years ended December 31, 2019, 2018 and 2017, respectively.
SUNSHINE SILVER MINING & REFINING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share, option and stock unit amounts)
11. Income Taxes (Continued)
A reconciliation of the actual income tax benefit and the tax computed by applying the applicable U.S. federal rate to the loss before income taxes is as follows:
| | Year Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2019 | 2018 | 2017 | |||||||
Tax benefit from continuing operations | $ | 7,491 | $ | 2,037 | $ | 3,965 | ||||
State tax benefit from continuing operations | 1,214 | 286 | 327 | |||||||
Nondeductible expenses | (3 | ) | (3 | ) | 101 | |||||
Change in valuation allowance | (5,472 | ) | (2,127 | ) | 14,295 | |||||
Effect of tax rate change | 866 | (851 | ) | (23,087 | ) | |||||
Effect of foreign tax rate differential | 193 | 183 | (56 | ) | ||||||
Net operating loss inflation rate adjustment | 26 | 7 | 16 | |||||||
Foreign branch tax benefit | 451 | 427 | 389 | |||||||
Net operating loss true-up | 37 | (11 | ) | (11,471 | ) | |||||
Taxation election true-up | — | — | 15,580 | |||||||
Exploration true-up | (4,904 | ) | — | — | ||||||
Other | 101 | 55 | (59 | ) | ||||||
| | | | | | | | | | | |
Total income tax benefit | $ | — | $ | 3 | $ | — | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
The net operating loss inflation rate adjustment relates to historical net operating loss carryforwards in Mexico from 2008 to 2019. These historical carryforwards have been adjusted based upon an inflation factor published by the central bank of Mexico, to reflect changes to the Company's tax basis in the net operating losses carried forward.
SUNSHINE SILVER MINING & REFINING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share, option and stock unit amounts)
11. Income Taxes (Continued)
The components of the net deferred tax assets (liabilities) are summarized as follows:
| | Year Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2019 | 2018 | 2017 | |||||||
Current deferred tax assets | ||||||||||
Accrued compensation | $ | 298 | $ | 232 | $ | 302 | ||||
Deferred share unit awards | 172 | 170 | 172 | |||||||
Other accrued liabilities | 24 | 24 | — | |||||||
Charitable contributions | 21 | 19 | 18 | |||||||
| | | | | | | | | | | |
Total current deferred tax assets | 515 | 445 | 492 | |||||||
Non-current deferred tax assets | ||||||||||
Acquisition costs | 104 | 115 | 131 | |||||||
Mineral properties | 3,860 | 3,774 | 3,782 | |||||||
Asset retirement obligation | 351 | 320 | 304 | |||||||
Property, plant and equipment | 581 | 492 | 421 | |||||||
Exploration | 2,515 | 7,874 | 8,500 | |||||||
Operating loss carryforward | 29,680 | 26,671 | 25,003 | |||||||
Foreign branch tax benefit | 8,736 | 2,095 | 1,454 | |||||||
Foreign exchange gain | 17 | 16 | 16 | |||||||
Inventory | 165 | 161 | 165 | |||||||
Stock options | 7,089 | 6,228 | 5,765 | |||||||
Other | — | 9 | 25 | |||||||
| | | | | | | | | | | |
Total non-current deferred tax assets | 53,098 | 47,756 | 45,566 | |||||||
Valuation allowances | (53,585 | ) | (48,109 | ) | (45,982 | ) | ||||
| | | | | | | | | | | |
Total deferred tax assets | 28 | 92 | 76 | |||||||
| | | | | | | | | | | |
Deferred tax liabilities | ||||||||||
OCI gain on available for sale securities | — | (3 | ) | — | ||||||
Prepaid expenses | (28 | ) | (89 | ) | (76 | ) | ||||
| | | | | | | | | | | |
Total deferred tax liabilities | (28 | ) | (92 | ) | (76 | ) | ||||
| | | | | | | | | | | |
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 provided a valuation allowance of $53,585, $48,109 and $45,982 against the net deferred tax assets as of December 31, 2019, 2018 and 2017, respectively. 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, 2019, the Company had $121,609 of net operating loss carryforwards in the United States, of which $102,331 expire at various dates through 2037, and $19,278 may be carried
SUNSHINE SILVER MINING & REFINING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share, option and stock unit amounts)
11. Income Taxes (Continued)
forward indefinitely. There are also $3,635 of net operating loss carryforwards (net of inflation adjustments) in Mexico expiring at various dates through 2029. 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. and Mexico. The statute of limitations for tax returns filed in the U.S. and Mexico is three years and five years, respectively, from the date of filing. The Company's 2019, 2018, 2017 and 2016 U.S. tax returns are subject to examinations by U.S. tax authorities until 2023, 2022, 2021 and 2020, respectively. The Company is no longer subject to examinations by Mexico tax authorities for years prior to 2015.
As of December 31, 2019, 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.
Effective January 1, 2017, the Company's Mexico assets and operations are owned by entities that have elected to be treated for United States tax purposes as corporations and, as a result, the taxable income or loss and other tax attributes of such entities are stated separately from the Company's United States assets and operations and are not included in the Company's United States federal consolidated income tax return. The Company's other foreign assets and operations are owned by entities that have elected to be treated for U.S. tax purposes as unincorporated branches of a U.S. holding company and, as a result, the taxable income or loss and other tax attributes of such entities are included in the Company's U.S. federal consolidated income tax return.
On December 22, 2017, the United States enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Act"). The Act makes broad changes to the United States tax code for corporations, including, but not limited to, (1) reducing the United States federal corporate tax rate from 35% to 21%; (2) allowing immediate deductibility for 100% of expenditures for qualified property through bonus depreciation; (3) eliminating the alternative minimum tax; and (4) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.
12. Segment Information
The Company operates in a single industry as a corporation engaged in the acquisition, development and exploration of silver mineral properties. The Company has mineral property interests in the U.S. and Mexico. The Company’sCompany's reportable segments are based on the Company’sCompany's mineral interests and management structure, and include the U.S., Mexico, and Corporate segments. The U.S. segment is undergoing an advanced exploration drilling program, improving the mining infrastructure, and maintaining the Sunshine Mine facility.Complex infrastructure. The Company’s Mexico segment engages in the exploration
| Year Ended December 31, 2012 | ||||||||||||||||
| U.S. | Mexico | Corporate | Total | |||||||||||||
Exploration | $ | 5,276 | $ | 13,866 | $ | — | $ | 19,142 | ||||||||
Pre-development | 22,043 | 2,187 | — | 24,230 | ||||||||||||
General and administrative | 3,214 | 523 | 10,779 | 14,516 | ||||||||||||
Amortization | 1,744 | 55 | 139 | 1,938 | ||||||||||||
Net other (income) expense | 54 | (284 | ) | — | (230 | ) | ||||||||||
Capital expenditures | 1,754 | 3,315 | 679 | 5,748 | ||||||||||||
Total assets | 33,593 | 14,242 | 62,005 | 109,840 | ||||||||||||
SUNSHINE SILVER MINESMINING & REFINING CORPORATION
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share, option and stock unit amounts)
12. Segment Information (Continued)
exploration on the Company's Mexican mineral properties and includes the Company's investment in its LGJV affiliate. Financial information relating to the Company's segments is as follows:
| | Year Ended December 31, 2019 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | U.S. | Mexico | Corporate | Total | |||||||||
Exploration | $ | 325 | $ | 923 | $ | — | $ | 1,248 | |||||
Pre-development | 2,317 | 1 | — | 2,318 | |||||||||
General and administrative | 1,943 | 312 | 2,587 | 4,842 | |||||||||
Amortization | 2,336 | 3 | 34 | 2,373 | |||||||||
Dilution loss in affiliates | — | — | 11,231 | 11,231 | |||||||||
Equity loss in affiliates | — | 12,865 | — | 12,865 | |||||||||
Arrangement fees | — | — | 2,988 | 2,988 | |||||||||
Net other (income) expense | (10 | ) | 31 | (68 | ) | (47 | ) | ||||||
Capital expenditures | 534 | — | — | 534 | |||||||||
Total assets | 31,475 | 55,372 | 67,448 | 154,295 | |||||||||
| | Year Ended December 31, 2018 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | U.S. | Mexico | Corporate | Total | |||||||||
Exploration | $ | 794 | $ | 915 | $ | — | $ | 1,709 | |||||
Pre-development | 2,527 | — | — | 2,527 | |||||||||
General and administrative | 1,775 | 54 | 2,567 | 4,396 | |||||||||
Amortization | 2,214 | 17 | 76 | 2,307 | |||||||||
Equity loss in affiliates | — | 464 | — | 464 | |||||||||
Arrangement fees | — | — | 283 | 283 | |||||||||
Net other (income) expense | (5 | ) | 16 | (33 | ) | (22 | ) | ||||||
Capital expenditures | 71 | — | — | 71 | |||||||||
Total assets | 33,567 | 79,869 | 33,125 | 146,561 | |||||||||
| | Year Ended December 31, 2017 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | U.S. | Mexico | Corporate | Total | |||||||||
Exploration | $ | 445 | $ | 735 | $ | — | $ | 1,180 | |||||
Pre-development | 2,408 | — | — | 2,408 | |||||||||
General and administrative | 1,610 | 399 | 4,485 | 6,494 | |||||||||
Amortization | 2,334 | — | 149 | 2,483 | |||||||||
Equity loss in affiliates | — | 160 | — | 160 | |||||||||
Net other (income) expense | 64 | 37 | (14 | ) | 87 | ||||||||
Capital expenditures | 330 | — | — | 330 | |||||||||
Total assets | 35,961 | 108,436 | 11,618 | 156,015 | |||||||||
13. Investment in Affiliates
During the years ended December 31, 2019, 2018 and 2017 the Company recognized a $12,865, $464 and $160 loss, respectively, on its investment in the LGJV Entities, representing its ownership share of the LGJV Entities' operating results. The combined financial position and results of operations
SUNSHINE SILVER MINING & REFINING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share, option and stock unit amounts)
13. Investment in Affiliates (Continued)
of the LGJV Entities as of December 31, 2019 and 2018, and for the years ended December 31, 2019, 2018 and 2017 are as follows:
LOS GATOS JOINT VENTURE
COMBINED BALANCE SHEETS
(in thousands)
| | 2019 | 2018 | |||||
|---|---|---|---|---|---|---|---|
ASSETS | |||||||
Current Assets | |||||||
Cash and cash equivalents | $ | 1,302 | $ | 11,231 | |||
Receivables | 5,655 | — | |||||
Inventories | 11,374 | 1,886 | |||||
VAT receivable | 50,184 | 30,853 | |||||
Restricted cash | — | 2,219 | |||||
Other current assets | 1,672 | 6,747 | |||||
| | | | | | | | |
Total current assets | 70,187 | 52,936 | |||||
Non-Current Assets | |||||||
Mine development, net | 182,602 | 99,994 | |||||
Deferred financing costs | — | 76 | |||||
Property, plant and equipment, net | 216,131 | 150,763 | |||||
| | | | | | | | |
Total non-current assets | 398,733 | 250,833 | |||||
Total Assets | $ | 468,920 | $ | 303,769 | |||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
LIABILITIES AND OWNERS' CAPITAL | |||||||
Current Liabilities | |||||||
Accounts payable and other accrued liabilities | $ | 43,287 | $ | 16,697 | |||
Dowa MPR Loan | — | 65,670 | |||||
Related party payable | 6,875 | 1,377 | |||||
Accrued interest | 885 | 2,692 | |||||
Equipment loans | 6,948 | 5,227 | |||||
| | | | | | | | |
Total current liabilities | 57,995 | 91,663 | |||||
Non-Current Liabilities | |||||||
Dowa Term Loan | 217,796 | 132,066 | |||||
Working Capital Facility | 60,000 | — | |||||
Equipment loans | 12,916 | 13,494 | |||||
Reclamation obligations | 11,314 | 10,524 | |||||
| | | | | | | | |
Total non-current liabilities | 302,026 | 156,084 | |||||
Owners' Capital | |||||||
Capital contributions | 237,905 | 168,967 | |||||
Paid-in capital | 7,400 | 1,358 | |||||
Accumulated deficit | (136,406 | ) | (114,303 | ) | |||
| | | | | | | | |
Total owners' capital | 108,899 | 56,022 | |||||
Total Liabilities and Owners' Capital | $ | 468,920 | $ | 303,769 | |||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
SUNSHINE SILVER MINING & REFINING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share, option and stock unit amounts)
13. Investment in Affiliates (Continued)
LOS GATOS JOINT VENTURE
COMBINING STATEMENT OF LOSS
(in thousands)
| | Twelve Months Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2019 | 2018 | 2017 | |||||||
Sales | $ | 36,508 | $ | — | $ | — | ||||
Operating expenses | ||||||||||
Cost of sales | 30,339 | — | — | |||||||
Royalties | 184 | — | — | |||||||
Exploration | 208 | — | — | |||||||
General and administrative | 2,587 | 83 | 116 | |||||||
Accretion expense | 789 | 9 | 17 | |||||||
Depreciation, depletion and amortization | 15,460 | — | — | |||||||
| | | | | | | | | | | |
Total operating expenses | 49,567 | 92 | 133 | |||||||
Other expense (income) | ||||||||||
Interest expense, net of capitalization | 5,107 | — | — | |||||||
Arrangement fee | 3,524 | — | — | |||||||
Other expense (income) | 239 | (53 | ) | (11 | ) | |||||
Foreign exchange (gain) loss | 174 | 623 | 112 | |||||||
| | | | | | | | | | | |
Total other expense (income) | 9,044 | 570 | 101 | |||||||
| | | | | | | | | | | |
Net loss | $ | (22,103 | ) | $ | (662 | ) | $ | (234 | ) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Prior to achievement of commercial production in September 2019, some expenses were capitalized to mine development.
14. Subsequent Events
In March 2020, the Company contributed $2,574 to the LGJV in support of continued operations. In June 2020, the Company contributed and additional $2,574 to the LGJV in support of continued operations.
On March 30, 2020, in response to the coronavirus pandemic, the Mexico government issued a temporary 30-day suspension of all non-essential activities, which was subsequently extended to May 31, 2020. Accordingly, the LGJV temporarily suspended non-essential activities. The LGJV resumed mining operations in late May 2020 as permitted by the Mexican Government.
In April 2020, the Company received $567 from a forgivable loan, bearing 1% annual interest, related to the Paycheck Protection Program of the United States' Coronavirus Aid, Relief and Economic Security Act.
The Company entered into a $15,000 convertible promissory note agreement with Electrum Silver US LLC, in 2020. The convertible promissory note incurs an annual interest of 5% and conversion provides a 20% discount to the next third-party financing share price. The convertible promissory note and any accrued but unpaid interest is due and payable on April 19, 2023, unless converted, exchanged or otherwise paid. As of June 26, 2020, the Company has received $10,000 under the convertible promissory note.
The Board of Managers
Los Gatos Joint Venture:
We have audited the accompanying combined financial statements of Los Gatos Joint Venture (the Company), which comprise the combined balance sheets as of December 31, 2019 and 2018, and the related combined statements of loss, combined statements of owners' capital, and cash flows for the years then ended, and the related notes to the combined financial statements.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these combined financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of combined financial statements that are free from material misstatement, whether due to fraud or error.
Auditors' Responsibility
Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the combined financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the combined financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Los Gatos Joint Venture as of December 31, 2019 and 2018, and the results of its operations and its cash flows for the years then ended in accordance with U.S. generally accepted accounting principles.
| /s/ KPMG LLP |
Denver, Colorado
April 1, 2020
LOS GATOS JOINT VENTURE
COMBINED BALANCE SHEETS
AS OF DECEMBER 31,
(In thousands)
| | 2019 | 2018 | |||||
|---|---|---|---|---|---|---|---|
ASSETS | |||||||
Current Assets | |||||||
Cash and cash equivalents | $ | 1,302 | $ | 11,231 | |||
Receivables | 5,655 | — | |||||
Inventories | 11,374 | 1,886 | |||||
VAT receivable | 50,184 | 30,853 | |||||
Restricted cash | — | 2,219 | |||||
Other current assets | 1,672 | 6,747 | |||||
| | | | | | | | |
Total current assets | 70,187 | 52,936 | |||||
Non-Current Assets | |||||||
Mine development, net | 182,602 | 99,994 | |||||
Deferred financing costs | — | 76 | |||||
Property, plant and equipment, net | 216,131 | 150,763 | |||||
| | | | | | | | |
Total non-current assets | 398,733 | 250,833 | |||||
Total Assets | $ | 468,920 | $ | 303,769 | |||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
LIABILITIES AND OWNERS' CAPITAL | |||||||
Current Liabilities | |||||||
Accounts payable and other accrued liabilities | $ | 43,287 | $ | 16,697 | |||
Dowa MPR Loan | — | 65,670 | |||||
Related party payable | 6,875 | 1,377 | |||||
Accrued interest | 885 | 2,692 | |||||
Equipment loans | 6,948 | 5,227 | |||||
| | | | | | | | |
Total current liabilities | 57,995 | 91,663 | |||||
Non-Current Liabilities | |||||||
Dowa Term Loan | 217,796 | 132,066 | |||||
Working Capital Facility | 60,000 | — | |||||
Equipment loans | 12,916 | 13,494 | |||||
Reclamation obligations | 11,314 | 10,524 | |||||
| | | | | | | | |
Total non-current liabilities | 302,026 | 156,084 | |||||
Owners' Capital | |||||||
Capital contributions | 237,905 | 168,967 | |||||
Paid-in capital | 7,400 | 1,358 | |||||
Accumulated deficit | (136,406 | ) | (114,303 | ) | |||
| | | | | | | | |
Total owners' capital | 108,899 | 56,022 | |||||
Total Liabilities and Owners' Capital | $ | 468,920 | $ | 303,769 | |||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
See accompanying notes to the combined financial statements.
LOS GATOS JOINT VENTURE
COMBINED STATEMENTS OF LOSS
FOR THE YEARS ENDED DECEMBER 31,
(In thousands)
| | 2019 | 2018 | |||||
|---|---|---|---|---|---|---|---|
Sales | $ | 36,508 | $ | — | |||
Operating expenses | |||||||
Cost of sales | 30,339 | — | |||||
Royalties | 184 | — | |||||
Exploration | 208 | — | |||||
General and administrative | 2,587 | 83 | |||||
Accretion expense | 789 | 9 | |||||
Depreciation, depletion and amortization | 15,460 | — | |||||
| | | | | | | | |
Total operating expenses | 49,567 | 92 | |||||
Other expense (income) | |||||||
Interest expense, net of capitalization | 5,107 | — | |||||
Arrangement fee | 3,524 | — | |||||
Other expense (income) | 239 | (53 | ) | ||||
Foreign exchange (gain) loss | 174 | 623 | |||||
| | | | | | | | |
Total other expense (income) | 9,044 | 570 | |||||
| | | | | | | | |
Net loss | $ | (22,103 | ) | $ | (662 | ) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
See accompanying notes to the combined financial statements.
LOS GATOS JOINT VENTURE
COMBINED STATEMENTS OF OWNERS' CAPITAL
(In thousands)
| | Capital Contributions | Paid-in Capital | Accumulated Deficit | Total | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance at December 31, 2017 | $ | 168,967 | $ | 329 | $ | (113,641 | ) | $ | 55,655 | ||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Contributions | — | — | — | — | |||||||||
Other | — | 84 | — | 84 | |||||||||
Costs paid by investor | — | 945 | — | 945 | |||||||||
Net loss | — | — | (662 | ) | (662 | ) | |||||||
| | | | | | | | | | | | | | |
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 | ||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
See accompanying notes to the combined financial statements.
LOS GATOS JOINT VENTURE
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(In thousands)
| | 2019 | 2018 | |||||
|---|---|---|---|---|---|---|---|
Cash flows from operating activities: | |||||||
Net loss | $ | (22,103 | ) | $ | (662 | ) | |
Adjustments to reconcile net income (loss) to net cash used by operating activities: | |||||||
Depreciation, depletion and amortization | 15,460 | — | |||||
Arrangement fee | 3,524 | — | |||||
Accretion | 789 | 9 | |||||
Other | (116 | ) | 83 | ||||
Changes in operating assets and liabilities: | |||||||
VAT receivable | (19,330 | ) | (27,369 | ) | |||
Receivables | (5,655 | ) | — | ||||
Inventories | (7,027 | ) | — | ||||
Other current assets | (977 | ) | — | ||||
Accounts payable and other accrued liabilities | 13,392 | — | |||||
Payable to related-party | 3,281 | — | |||||
Accrued interest | 2,745 | — | |||||
| | | | | | | | |
Net cash used by operating activities | (16,017 | ) | (27,939 | ) | |||
| | | | | | | | |
Cash flows from investing activities: | |||||||
Deposits | 1,005 | (1,001 | ) | ||||
Other current assets | 2,661 | (5,684 | ) | ||||
Mine development | (74,630 | ) | (65,007 | ) | |||
Purchase of property, plant and equipment | (53,811 | ) | (93,386 | ) | |||
Accrued interest | (513 | ) | — | ||||
Restricted cash transfers | 2,219 | (2,219 | ) | ||||
| | | | | | | | |
Net cash used by investing activities | (123,069 | ) | (167,297 | ) | |||
| | | | | | | | |
Cash flows from financing activities: | |||||||
Capital contributions | 18,200 | — | |||||
Deferred financing costs | (222 | ) | (453 | ) | |||
Equipment loan payments | (6,485 | ) | (1,486 | ) | |||
Working Capital Facility borrowings | 60,000 | — | |||||
Dowa MPR Loan payment | (17,336 | ) | — | ||||
Dowa MPR Loan borrowings | — | 65,678 | |||||
Dowa Term Loan borrowings | 75,000 | 135,000 | |||||
Dowa Term Loan origination cost | — | (4,200 | ) | ||||
| | | | | | | | |
Net cash provided by financing activities | 129,157 | 194,539 | |||||
| | | | | | | | |
Net decrease in cash and cash equivalents | (9,929 | ) | (697 | ) | |||
Cash and cash equivalents, beginning of period | 11,231 | 11,928 | |||||
| | | | | | | | |
Cash and cash equivalents, end of period | $ | 1,302 | $ | 11,231 | |||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Interest paid | $ | 3,940 | $ | — | |||
Supplemental dislosure of noncash transactions: | |||||||
Accrued interest on debt included in mine development | $ | 4,213 | $ | 1,858 | |||
Accrued interest on debt included in property, plant and equipment | $ | 4,322 | $ | 2,584 | |||
Equipment loan borrowings | $ | 7,679 | $ | 20,207 | |||
Conversion of Dowa MPR Loan to capital contributions | $ | 50,737 | $ | — | |||
Conversion of related party accrued interest to outstanding loan balance | $ | 10,179 | $ | — | |||
Depreciation expense included in mine development | $ | 4,589 | $ | 2,266 | |||
Mine development costs included in accrued liabilities | $ | 10,720 | $ | 5,481 | |||
Property, plant and equipment included in accrued liabilities | $ | 10,290 | $ | 5,224 | |||
Equity method investee costs incurred by investor | $ | 2,634 | $ | 945 | |||
Deferred financing costs included in PPE and mine development | $ | 495 | $ | — | |||
See accompanying notes to the combined financial statements.
LOS GATOS JOINT VENTURE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
(In thousands, except share, per share and option amounts)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 Los Gatos Project (LGP) in northern Mexico. The LGJV consists of Minera Plata Real S. de R.L. de C.V. ("MPR"), Operaciones San Jose de Plata S. de R.L. de C.V. and Servicios San Jose de Plata S. de R.L. de C.V. (collectively the "LGJV Entities"). 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 Sunshine Silver Mining & Refining Corporation ("SSMRC"). The ownership of the LGJV Entities as of December 31, 2019 is 51.5% SSMRC and 48.5% Dowa, see footnote 9 for additional detail on LGJV Entities ownership changes.
In 2016, the LGJV completed an advanced definition drilling program and began decline development to provide the necessary data to complete a feasibility study. Prior to completing the feasibility study, the Company was in the exploration stage. The January 12, 2017 feasibility study ("Feasibility Study") demonstrated the economic viability of the LGP, and during the first quarter of 2017, the Company commenced the $316,000 LGP development.
| Year Ended December 31, 2011 | ||||||||||||||||
| U.S. | Mexico | Corporate | Total | |||||||||||||
Exploration | $ | 2,183 | $ | 17,023 | $ | 53 | $ | 19,259 | ||||||||
Pre-development | 6,247 | 532 | — | 6,779 | ||||||||||||
General and administrative | 3,614 | 823 | 9,436 | 13,873 | ||||||||||||
Amortization | 1,280 | 23 | 69 | 1,372 | ||||||||||||
Net other (income) expense | (35 | ) | 472 | — | 437 | |||||||||||
Capital expenditures | 3,043 | 8,818 | 491 | 12,352 | ||||||||||||
Total assets | 37,023 | 16,367 | 112,980 | 166,370 | ||||||||||||
On September 1, 2019, the LGP commenced commercial production of its two concentrate products; a lead concentrate and a zinc concentrate. The Company's lead and zinc concentrates are sold to third-party customers.
| Year Ended December 31, 2010 | ||||||||||||||||
| U.S. | Mexico | Corporate | Total | |||||||||||||
Exploration | $ | 205 | $ | 14,433 | $ | — | $ | 14,638 | ||||||||
Pre-development | 1,783 | — | — | 1,783 | ||||||||||||
General and administrative | 3,929 | 1,326 | 228 | 5,483 | ||||||||||||
Amortization | 760 | 13 | — | 773 | ||||||||||||
Net other (income) expense | (7 | ) | 1,898 | — | 1,891 | |||||||||||
Related-party debt | — | 31,000 | — | 31,000 | ||||||||||||
Capital expenditures | 29,464 | 1,366 | — | 30,830 | ||||||||||||
Total assets | 31,090 | 4,986 | — | 36,076 | ||||||||||||
2. Summary of Significant Accounting Policies
Risks and uncertainties
As a mining company, the Company'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's financial position, results of operations, cash flows, and the quantities of reserves the Company can economically produce. The carrying value of the Company'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'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's ability to recover its investment in certain assets and result in impairment charges.
The Company has considered and assessed the risk resulting from its concentrate sales arrangements with its customers. In the event that the Company's relationships with its customers are interrupted for any reason, the Company believes that it would be able to locate another customer to purchase its metals concentrates; however, any interruption could temporarily disrupt the Company's sale of its products and adversely affect operating results.
LOS GATOS JOINT VENTURE
NOTES TO THE COMBINED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share and option amounts, tonnes or as otherwise noted)
2. Summary of Significant Accounting Policies (Continued)
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("U.S. 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 Company 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; 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) loss in the computation of net loss. Non-monetary assets and liabilities are translated into U.S. dollars at 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 Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Metal and Materials Inventories
The Company'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
The Feasibility Study established LGP's proven and probable reserves in early January 2017. Accordingly, subsequent development costs were capitalized as mine development assets until September 1, 2019 when the LGP achieved production. Subsequent to September 1, 2019, costs incurred to develop the mine are capitalized to mine development assets. Upon the commencement of production, capitalized costs are charged to operations using the units-of-production method in the period the applicable metal reserves are processed over the estimated proven and probable reserve tons directly benefiting from the capital expenditures. The LGJV incurred $7,291 and nil for the years ended December 31, 2019 and 2018, respectively, in depletion expense.
LOS GATOS JOINT VENTURE
NOTES TO THE COMBINED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share and option amounts, tonnes or as otherwise noted)
2. Summary of Significant Accounting Policies (Continued)
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 estimated useful lives of furniture, fixtures and computers range from three to ten years.
Impairment of long-lived assets
Long-lived assets, such as 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 Company first compares undiscounted cash flows expected to be generated 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. There were no impairments recognized for 2019 or 2018.
Value added tax receivable and payable
Value added taxes ("VAT") are assessed on purchases of materials, services and sales of products. The Company is entitled to recover the taxes they have paid related to purchases of materials and services. The Company 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 Company 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 Company 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 Company reviews, on an annual basis, unless otherwise deemed necessary, its reclamation obligation.
LOS GATOS JOINT VENTURE
NOTES TO THE COMBINED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share and option amounts, tonnes or as otherwise noted)
2. Summary of Significant Accounting Policies (Continued)
Revenue Recognition
The Company 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 future quotational period at the time of sale. 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'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 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. The Company recognizes tax penalties in income tax expense.
Recently issued accounting standards
In February 2012, air monitoring2016, the FASB issued ASU 2016-02, "Leases," 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's fiscal year beginning January 1, 2021. The Company 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 Company is in the process of assessing 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 adoption is permitted. The Company is completing its assessment of the impact and anticipated adoption date of this guidance.
LOS GATOS JOINT VENTURE
NOTES TO THE COMBINED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share and option amounts, tonnes or as otherwise noted)
3. Sales
The Company's sales by concentrate for the year ended December 31, are summarized below:
| | 2019 | 2018 | |||||
|---|---|---|---|---|---|---|---|
Lead Concentrate | $ | 28,437 | $ | — | |||
Zinc Concentrate | 8,071 | — | |||||
| | | | | | | | |
| $ | 36,508 | $ | — | ||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
4. Inventories
The Company's inventories as of December 31, are summarized below:
| | 2019 | 2018 | |||||
|---|---|---|---|---|---|---|---|
Ore inventory | $ | 4,863 | $ | 691 | |||
Concentrate inventory | 1,096 | — | |||||
Material and supplies | 5,415 | 1,195 | |||||
| | | | | | | | |
| $ | 11,374 | $ | 1,886 | ||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
5. Other Current Assets
The Company's other current assets as of December 31, are summarized below:
| | 2019 | 2018 | |||||
|---|---|---|---|---|---|---|---|
Prepaid expenses | $ | 1,432 | $ | 5,761 | |||
Deposits and other | 240 | 986 | |||||
| | | | | | | | |
| $ | 1,672 | $ | 6,747 | ||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
6. Property, Plant and Equipment, net
The Company's property, plant and equipment detectedas of December 31, are summarized below:
| | 2019 | 2018 | |||||
|---|---|---|---|---|---|---|---|
Mineral properties | $ | 853 | $ | 853 | |||
Infrastructure & equipment | 216,759 | 138,373 | |||||
Land | 14,422 | 14,422 | |||||
Furniture and fixtures | 508 | 365 | |||||
| | | | | | | | |
Property, plant and equipment at cost | 232,542 | 154,012 | |||||
Less accumulated depreciation | (16,411 | ) | (3,249 | ) | |||
| | | | | | | | |
Property, plant and equipment, net | $ | 216,131 | $ | 150,763 | |||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Mineral Properties
The Company conducts exploration activities under mining concessions in Mexico.
LOS GATOS JOINT VENTURE
NOTES TO THE COMBINED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share and option amounts, tonnes or as otherwise noted)
6. Property, Plant and Equipment, net (Continued)
The Company 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 Company is required to make quarterly advance royalty payments and 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. During the pre-production phase, the Company is obligated to complete a minimum of $100 of exploration and development work annually on the concession. The agreement has no expiration date; however, the Company may terminate the agreement upon a 30-day notice. Under this agreement, the first royalty payment is due on or before March 31, 2021, net of advance royalty payments. The Company has remitted $535 in advance royalty payments under this contract through December 31, 2019.
As of December 31, 2019, the Company's minimum La Cuesta obligation is summarized in the table below:
2020 | $ | 100 | ||
2021 | 100 | |||
2022 | 100 | |||
2023 | 100 | |||
2024 | 100 | |||
Thereafter | 13,965 | |||
| | | | | |
Total | $ | 14,465 | ||
| | | | | |
| | | | | |
| | | | | |
The Company paid $45 and $40 for this obligation for the years ended December 31, 2019 and 2018, respectively.
LOS GATOS JOINT VENTURE
NOTES TO THE COMBINED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share and option amounts, tonnes or as otherwise noted)
7. Accounts Payable and Other Accrued Liabilities
The Company's accounts payable and other accrued liabilities as of December 31, are summarized below:
| | 2019 | 2018 | |||||
|---|---|---|---|---|---|---|---|
Accounts payable | $ | 29,669 | $ | 5,520 | |||
Accrued expenses | 12,580 | 10,951 | |||||
Accrued payroll and taxes | 1,038 | 226 | |||||
| | | | | | | | |
Total accounts payable and accrued liabilities | $ | 43,287 | $ | 16,697 | |||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
8. Related-Party Transactions
Effective January 1, 2015, the LGJV has a management services agreement with SSMRC whereby, SSMRC provides certain consulting and administrative services. The LGJV incurred $5,100 and $3,950 for the years ended December 31, 2019 and 2018, respectively, for these services. Certain expenses incurred by the owners on behalf of the LGJV are reimbursed.
9. Related Party Debt
On July 11, 2017, the Company entered into a loan agreement ("Term Loan") with Dowa whereby the Company can borrow up to $210,000 for LGP development, with a maturity date of December 29, 2027. Interest on this loan accrues daily at LIBOR plus 2.35%, but the interest is added to the amount borrowed for repayment monthly until December 29, 2019. 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. The Term Loan also requires accelerated principal payments equal to 70% of excess cash flows (as defined) from the LGP. As of December 31, 2019, the Company had $221,900 outstanding, including $11,900 of interest, under the Term Loan. In early 2019, the Company borrowed the remaining $75,000 available under the Term Loan. As of December 31, 2018, the Company had $137,300 outstanding, including $2,300 of interest, under the Term Loan. Prior to production commencing in September 2019, $7,100 of interest was capitalized to Mine Development or Property, Plant and Equipment. Subsequent to production, $3,400 of interest was expensed. During 2018, all interest was capitalized to Mine Development or Property, Plant and Equipment.
On January 23, 2018, the Company entered into a loan agreement ("Dowa MPR Loan") whereby the Company could borrow up to $65,000 for LGP development. Interest on this loan accrues daily at LIBOR plus 1.5%. but the interest is 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 LGP development. If the Dowa MPR Loan was not repaid by the maturity date, Dowa could elect to convert all or a portion of SSMRC's portion of the outstanding Dowa MPR Loan, including accrued interest, to additional equity in the LGJV Entities at 170% of SSMRC's portion of the outstanding balance ("Additional Equity"). If SSMRC's ownership in the LGJV Entities was diluted, for two years from the maturity date, SSMRC can 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, SSMRC
LOS GATOS JOINT VENTURE
NOTES TO THE COMBINED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share and option amounts, tonnes or as otherwise noted)
9. Related Party Debt (Continued)
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 Dowa MPR Loan was fully extinguished with a principal and interest payment of $18,200 and the conversion of the remaining principal and interest of $50,737 to additional Dowa ownership in the LGJV entities. Subsequent to this transaction the ownership of the LGJV entities is 51.5% SSMRC and 48.5% Dowa.
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. Interest on the WCF accrues daily at LIBOR plus 3.0%. The maturity date of the WCF is June 28, 2021. As of December 31, 2019, the LGJV had $60,000 of principal and $8 of accrued interest outstanding under this facility. The Company paid interest of $1,419 under this facility for the year ended December 31, 2019.
SSMRC incurs 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.
Scheduled minimum debt repayments are as follows for the year ending December 31:
2020 | $ | 6,948 | ||
2021 | 98,780 | |||
2022 | 37,337 | |||
2023 | 32,277 | |||
2024 | 31,826 | |||
Thereafter | 95,478 | |||
| | | | | |
| $ | 302,647 | |||
| | | | | |
| | | | | |
| | | | | |
10. Owners' Capital
During 2019, Dowa and SSMRC, contributed $50,737 and $18,200, respectively, as owners' capital to the LGJV as a result of the extinguishment of the Dowa MPR Loan. As of December 31, 2019, the ownership of the LGJV entities was 51.5% SSMRC and 48.5% Dowa. As of December 31, 2018, the ownership of the LGJV entities was 70% SSMRC and 30% Dowa.
11. Asset Retirement Obligations
In 2015, the Company recognized an underground fireARO related to the work performed at the 3100LGP. The Company estimated the present value of the estimated future cash flows required to revegetate the disturbed areas and perform any required monitoring. The Company used a discount rate and interest 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 Company recognized an ARO related to the additional development work performed at the LGP. The Company estimated the present value of the estimated future cash flows required to reclaim the disturbed areas and perform any required monitoring. The Company used a discount rate and interest rate of 7.5% and 3%, respectively, to calculate the present value.
LOS GATOS JOINT VENTURE
NOTES TO THE COMBINED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share and option amounts, tonnes or as otherwise noted)
11. Asset Retirement Obligations (Continued)
The Company recorded accretion expense related to the ARO of $790 and $9 for the years ended December 31, 2019 and 2018, respectively. The following table summarizes activity in the Company's ARO as of December 31:
| | 2019 | 2018 | |||||
|---|---|---|---|---|---|---|---|
Balance, beginning of period | $ | 10,524 | $ | 207 | |||
Accretion expense | 790 | 9 | |||||
ARO additions | — | 10,308 | |||||
| | | | | | | | |
Balance, end of period | $ | 11,314 | $ | 10,524 | |||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
12. 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.
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.
Financial Assets and Liabilities
At December 31, 2019 the Company'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's debt obligations as of December 31, 2019 and 2018 and are included in Level 2 of the fair value hierarchy. The Term Loan is carried at amortized cost. The fair value of the WCF approximates carrying value as the liability is secured, has a variable interest rate, and lacks credit concerns. The carrying value of the equipment loans approximate fair value as the liability is secured by the underlying equipment, guaranteed by SSMRC, and lacks
LOS GATOS JOINT VENTURE
NOTES TO THE COMBINED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share and option amounts, tonnes or as otherwise noted)
12. Fair Value Measurements (Continued)
significant credit concerns. The fair value of the Term Loan was estimated using observable inputs directly related to the obligations. The following table summarizes the fair value as of December 31:
| | 2019 | 2018 | |||||
|---|---|---|---|---|---|---|---|
Term Loan(1) | $ | 221,929 | $ | 136,750 | |||
WCF | 60,000 | — | |||||
Equipment Loans | 19,864 | 18,721 | |||||
| | | | | | | | |
| $ | 301,793 | $ | 155,471 | ||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Non-Financial Assets and Liabilities
The Company discloses and recognizes its non-financial assets and liabilities, such as ARO, at fair value on a non-recurring basis. The estimated fair value for these non-financial assets and liabilities are classified as Level 3 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 liabilities without observable inputs and no market activity.
13. Commitments and Contingencies
In determining 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.
The Company'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 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.
From time to time, the Company 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's combined financial condition or results of operations.
14. Equipment Loans
During 2019 and 2018, 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
LOS GATOS JOINT VENTURE
NOTES TO THE COMBINED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share and option amounts, tonnes or as otherwise noted)
14. Equipment Loans (Continued)
mining equipment purchases. As of December 31, 2019, and 2018, the Company had outstanding loans of $19,915 and $18,721, respectively, and incurred $1,647 and $607 of interest, respectively. Prior to production and during 2018 all interest was capitalized to Property, Plant and Equipment. Subsequent to production in September 2019, all interest on equipment was expensed. SSMRC has guaranteed the payment of all obligations, including accrued interest, under the equipment loan agreements.
15. Income Taxes
The combined loss before income taxes in Mexico is $22,103 and $662 for the years ended December 31, 2019 and 2018, respectively. The combined current and deferred income tax expense for the years ended December 31, 2019 and 2018 was nil.
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:
| | 2019 | 2018 | |||||
|---|---|---|---|---|---|---|---|
Tax benefit from continuing operations | $ | (6,631 | ) | $ | (199 | ) | |
Nondeductible Expenses | 2,244 | 1,207 | |||||
Change in Valuation Allowance | 3,773 | 16,052 | |||||
NOL inflation adjustment | 41 | (17,060 | ) | ||||
NOL expiration | 574 | — | |||||
| | | | | | | | |
Total income tax expense (benefit) | $ | — | $ | — | |||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
The net operating loss (NOL) inflation rate adjustment relates to historical net operating loss carryforwards in Mexico from 2007 to 2019. 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's basis in the net operating losses during the carryforward period.
LOS GATOS JOINT VENTURE
NOTES TO THE COMBINED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share and option amounts, tonnes or as otherwise noted)
15. Income Taxes (Continued)
A summary of the components of the net deferred tax assets for the year ended December 31, is as follows:
| | 2019 | 2018 | |||||
|---|---|---|---|---|---|---|---|
Deferred tax assets | |||||||
Accrued Expenses | $ | 112 | $ | 105 | |||
Exploration and Development | 8,451 | 10,096 | |||||
Operating loss carryforward | 35,589 | 31,685 | |||||
NOL, inflation adjustment | 5,838 | 4,412 | |||||
Valuation allowances | (49,567 | ) | (45,794 | ) | |||
| | | | | | | | |
Total deferred tax assets | 423 | 504 | |||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Deferred tax liabilities | |||||||
Prepaid expenses | (103 | ) | (292 | ) | |||
Fixed Assets | (320 | ) | (212 | ) | |||
| | | | | | | | |
Deferred tax liabilities | (423 | ) | (504 | ) | |||
Total deferred tax liability | (423 | ) | (504 | ) | |||
| | | | | | | | |
Net deferred income tax assets (liabilities) | $ | — | $ | — | |||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Based upon the level of taxable income (loss) 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 Company will not realize the benefits of these deductible differences, and thus has recorded a valuation allowance against the net deferred tax asset balance of $49,567. If the Company is profitable for a number of years and prospects for the realization of 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, 2019, the Company had $138,089 of net operating loss carryforwards in Mexico (including inflation adjustments) which expire at various dates through 2029. The statute of limitations for tax returns filed in Mexico is five years from the date of filing. The tax returns of the Company are no longer subject to examinations by Mexican tax authorities for years prior to 2015.
As of December 31, 2019, the Company has not recorded any 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 Company 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.
16. Subsequent Events
On March 30, 2020, in response to the coronavirus pandemic, the Mexico government issued a temporary 30-day suspension of all non-essential activities ("Mexico Advisory"). Accordingly, the Company will temporarily suspend the non-essential LGJV activities. The Company will be able to maintain essential activities during the suspension with its existing cash, receivables and, if necessary, additional owner capital contributions.
LOS GATOS JOINT VENTURE
NOTES TO THE COMBINED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share and option amounts, tonnes or as otherwise noted)
16. Subsequent Events (Continued)
Due to the recent declines in the silver and zinc prices, the Company has developed an optimized mining and processing plan ("Optimized Plan") to be implemented in 2020. Should silver and zinc prices remain relatively low at the expiration of the Mexico Advisory, the Company expects to begin implementing the Optimized Plan. The Optimized Plan processes higher-grade ore, at a slightly lower throughput, to cover operating costs while metals prices remain low. The Optimized Plan provides flexibility to return to design production rates as metal prices improve.
There are no other events or transactions requiring recognition in these combined financial statements, through April 1, 2020.
SUNSHINE SILVER MINING & REFINING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except for share and per share amounts)
| | June 30, 2020 | December 31, 2019 | |||||
|---|---|---|---|---|---|---|---|
ASSETS | |||||||
Current Assets | |||||||
Cash and cash equivalents | $ | 1,954 | $ | 9,085 | |||
Materials and supplies inventory | 108 | 103 | |||||
Deferred financing costs | 2,514 | 1,777 | |||||
Related party receivables | 9,755 | 6,422 | |||||
Other current assets | 1,123 | 1,068 | |||||
| | | | | | | | |
Total current assets | 15,454 | 18,455 | |||||
Non-Current Assets | |||||||
Investment in affiliates | 91,452 | 105,396 | |||||
Metals inventory | 250 | 250 | |||||
Property, plant and equipment, net | 28,991 | 30,194 | |||||
| | | | | | | | |
Total Assets | $ | 136,147 | $ | 154,295 | |||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||
Current Liabilities | |||||||
Accounts payable and other accrued liabilities | $ | 3,049 | $ | 3,465 | |||
Related-party convertible note | 10,000 | — | |||||
Non-Current Liabilities | |||||||
Reclamation obligations | 1,494 | 1,439 | |||||
Shareholders' Equity | |||||||
Common Stock, $0.001 par value; 100,000,000 shares authorized; 80,646,832 shares outstanding as of June 30, 2020 and December 31, 2019 | 80 | 80 | |||||
Paid-in capital | 378,099 | 375,921 | |||||
Accumulated deficit | (255,548 | ) | (225,583 | ) | |||
Treasury stock, at cost, 289,177 shares as of June 30, 2020 and December 31, 2019 | (1,027 | ) | (1,027 | ) | |||
| | | | | | | | |
Total shareholders' equity | 121,604 | 149,391 | |||||
| | | | | | | | |
Total Liabilities and Shareholders' Equity | $ | 136,147 | $ | 154,295 | |||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
See accompanying notes to the condensed consolidated financial statements.
SUNSHINE SILVER MINING & REFINING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)
(In thousands, except for share and per share amounts)
| | Six Months Ended June 30, | ||||||
|---|---|---|---|---|---|---|---|
| | 2020 | 2019 | |||||
Expenses | |||||||
Exploration | $ | 598 | $ | 527 | |||
Pre-development | 1,048 | 1,140 | |||||
General and administrative | 3,257 | 2,689 | |||||
Amortization | 1,203 | 1,238 | |||||
| | | | | | | | |
Total expenses | 6,106 | 5,594 | |||||
Other expense (income) | |||||||
Dilution loss on affiliates | — | 11,231 | |||||
Equity loss in affiliates | 21,516 | 311 | |||||
Arrangement fees | 2,285 | 895 | |||||
Interest expense | 43 | — | |||||
Other income | (9 | ) | (15 | ) | |||
Foreign exchange loss | 24 | 6 | |||||
| | | | | | | | |
Net other expense | 23,859 | 12,428 | |||||
| | | | | | | | |
Net loss | $ | 29,965 | $ | 18,022 | |||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Other comprehensive loss | |||||||
Unrealized loss on securities, net of tax | — | 5 | |||||
| | | | | | | | |
Comprehensive loss | $ | 29,965 | $ | 18,027 | |||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Net loss per share: | |||||||
Basic and diluted | $ | 0.37 | $ | 0.24 | |||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Weighted average shares outstanding: | |||||||
Basic and diluted | 81,011,188 | 75,050,171 | |||||
See accompanying notes to the condensed consolidated financial statements.
SUNSHINE SILVER MINING & REFINING CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
(In thousands, except for share amounts)
| | Number | Amount | | | | | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Common Stock | Treasury Stock | Common Stock | Treasury Stock | Paid-in Capital | Accumulated Deficit | Other Comprehensive Loss | Total | |||||||||||||||||
Balance at December 31, 2019 | 80,646,832 | 289,177 | $ | 80 | $ | (1,027 | ) | $ | 375,921 | $ | (225,583 | ) | $ | — | $ | 149,391 | |||||||||
Stock-based compensation | — | — | — | — | 2,117 | — | — | 2,117 | |||||||||||||||||
Deferred share unit compensation | — | — | — | — | 61 | — | — | 61 | |||||||||||||||||
Net loss | — | — | — | — | — | (29,965 | ) | — | (29,965 | ) | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at June 30, 2020 | 80,646,832 | 289,177 | 80 | (1,027 | ) | 378,099 | (255,548 | ) | — | 121,604 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2018 | 73,902,522 | 289,177 | $ | 74 | $ | (1,027 | ) | $ | 331,802 | $ | (187,765 | ) | $ | (32 | ) | 143,052 | |||||||||
Issuance of common stock | 4,244,310 | — | 4 | — | 25,462 | — | — | 25,466 | |||||||||||||||||
Stock-based compensation | — | — | — | — | 1,722 | — | — | 1,722 | |||||||||||||||||
Deferred share unit compensation | — | — | — | — | 316 | — | — | 316 | |||||||||||||||||
Unrealized loss on investments, net of tax | — | — | — | — | — | — | (5 | ) | (5 | ) | |||||||||||||||
Other | — | — | — | — | 34 | — | — | 34 | |||||||||||||||||
Net loss | — | — | — | — | — | (18,022 | ) | — | (18,022 | ) | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at June 30, 2019 | 78,146,832 | 289,177 | 78 | (1,027 | ) | 359,336 | (205,787 | ) | (37 | ) | 152,563 | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes to the condensed consolidated financial statements.
SUNSHINE SILVER MINING & REFINING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
| | Six Months Ended June 30, | ||||||
|---|---|---|---|---|---|---|---|
| | 2020 | 2019 | |||||
OPERATING ACTIVITIES | |||||||
Net loss | $ | (29,965 | ) | $ | (18,022 | ) | |
Adjustments to reconcile net loss to net cash used by operating activities: | |||||||
Amortization | 1,203 | 1,176 | |||||
Dilution loss on affiliate | — | 11,231 | |||||
Accretion expense | 55 | 47 | |||||
Stock-based compensation expense | 2,117 | 1,722 | |||||
Equity loss in affiliates | 21,516 | 311 | |||||
Other | — | 7 | |||||
Changes in operating assets and liabilities: | |||||||
Other current assets | (55 | ) | 167 | ||||
Receivables from related-parties | (3,332 | ) | (395 | ) | |||
Accounts payable and other accrued liabilities | (1,071 | ) | (516 | ) | |||
Materials and supplies inventory | (5 | ) | (1 | ) | |||
| | | | | | | | |
Net cash used by operating activities | (9,537 | ) | (4,273 | ) | |||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
]INVESTING ACTIVITIES | |||||||
Purchase of property, plant and equipment | — | (427 | ) | ||||
Investment in affiliates | (7,573 | ) | (19,149 | ) | |||
| | | | | | | | |
Net cash used by investing activities | (7,573 | ) | (19,576 | ) | |||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
FINANCING ACTIVITIES | |||||||
Related-party convertible debt | 10,000 | — | |||||
Payroll Protection Program loan | 567 | — | |||||
Deferred financing costs | (588 | ) | — | ||||
Issuance of common stock | — | 25,466 | |||||
| | | | | | | | |
Net cash provided by financing activities | 9,979 | 25,466 | |||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Net increase (decrease) in cash and cash equivalents | (7,131 | ) | 1,617 | ||||
Cash and cash equivalents, beginning of period | 9,085 | 3,457 | |||||
| | | | | | | | |
Cash and cash equivalents, end of period | $ | 1,954 | $ | 5,074 | |||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Supplemental disclosure of noncash transactions: | |||||||
Deferred financing costs included in accounts payable and accrued liabilities | $ | 149 | $ | — | |||
See accompanying notes to the condensed consolidated financial statements.
SUNSHINE SILVER MINING & REFINING CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share, per share, option, and stock unit amounts)
1. Description of Business and Basis of Preparation of Financial Statements
These financial statements represent the consolidated financial position and results of operations of Sunshine Silver Mining & Refining Corporation and its subsidiaries ("SSMRC" or "the Company"). Unless the context otherwise requires, references to Sunshine Silver or the Company mean the Sunshine Silver Mining & Refining Corporation and its consolidated subsidiaries.
United States—Sunshine Complex
The Company has conducted an advanced exploration drilling program and a rehabilitation program to improve certain mining infrastructure at the Sunshine Mine. The Sunshine Complex, located in the Coeur d'Alene Mining District in Idaho, is comprised of the Sunshine Mine. All mine personnel were safely evacuated,Mine and the federalSunshine Big Creek Refinery. The Sunshine Mine Safetyis currently on care and Health Administrationmaintenance, with a continued but reduced program of infrastructure improvement. A Sunshine Mine preliminary economic assessment was notified.completed in December 2012, and subsequently updated in January 2020. On October 10, 2013, the Company purchased the Sunshine Big Creek Refinery ("Refinery"). The fire was extinguishedRefinery is currently on care and maintenance.
Mexico—Los Gatos Project
The Company's primary Mexico 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 project ("LGP") with Dowa Metals and Mining Co., Ltd. ("Dowa"). The LGJV operating entities consist of Minera Plata Real S. de R.L. de C.V ("MPR"), Operaciones San Jose del Plata S. de R.L. de C.V. ("OSJ") and Servicios San Jose del Plata S. de R.L. de C.V. (collectively the "LGJV Entities"). The LGJV completed an advanced definitional drilling and decline development program in 2016 and completed a feasibility study in January 2017. Dowa completed its $50,000 funding requirement on April 1, 2016; thereby acquiring an initial 30% interest in the LGJV and the right to purchase future zinc-concentrate production at market rates. In May 2019, Dowa increased its ownership interest to 48.5% through the conversion of the Dowa MPR Loan to equity, see Note 11 for further discussion. The LGJV ownership is currently 51.5% SSMRC and 48.5% Dowa.
On September 1, 2019, the LGP commenced commercial production of its two concentrate products; a lead concentrate and a zinc concentrate. The LGP's lead concentrate is sold to customers within the country of Mexico while the LGP's zinc concentrate is sold to Dowa or sold to a customer within the country of Mexico.
On March 2012, access30, 2020, in response to the upper levelscoronavirus pandemic, the Mexican government issued a temporary 30-day suspension of all non-essential activities, which was subsequently extended to May 31, 2020. Accordingly, the LGJV temporarily suspended non-essential activities. The LGJV resumed mining operations in late May 2020 as permitted by the Mexican Government.
The Company's financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has a history of operating losses and cash outflows from operations, which are expected to continue through at least 2021. Management evaluates whether conditions or events raise substantial doubt about the Company's ability to continue as a going concern within one year after the date the consolidated interim financial statements are issued. In performing this assessment,
SUNSHINE SILVER MINING & REFINING CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share, option, and stock unit amounts)
1. Description of Business and Basis of Preparation of Financial Statements (Continued)
management considered the risks associated with its ongoing ability to fund the Company's existing operations, specifically its holding costs at the Sunshine Complex, general and administrative expenses, and the Company's obligations related to the LGJV, which includes $45 million in capital contributions to the LJGV in June 2021. The Company has received a financial support commitment for $18,000 from Electrum its primary shareholder, which matures on June 25, 2021. Based on the Company's current cash flow forecasts, there is an expected cash shortfall within one year of the mine was reestablished in April 2012, and access to the lower levelsissuance date of the mine was reestablished in June 2012. Subsequent to regaining access to the lower levels of the mine, the Company determined that the fire did not enter the main shafts nor cause any significant damage to the infrastructure of the Sunshine Mine.interim financial statements. As a result, the Company believeswill need to raise additional funds through the fire will not significantly impactissuance of debt or equity to refinance or otherwise retire obligations, in order to satisfy the Company’sguarantee of the LGJV Working Capital Facility (WCF) and LGJV Term Loan (Term Loan) and fund its operations. The Company is currently preparing for an IPO and expects the proceeds to be sufficient to meet its obligations through at least September 2021. However, the ability to pursueraise capital is dependent on certain matters that are outside of the Company's control. Therefore, there is substantial doubt about the Company's ability to continue as a going concern through September 2021, and the Company may not be able to maintain its future mine refurbishment activities or future mine operations. Through51.5% LGJV ownership. The consolidated financial statements do not include any adjustments that might result from an outcome of this uncertainty.
Mexico—Exploration
The Company's other regional Mexico exploration efforts are conducted through its wholly-owned subsidiary, Minera Luz del Sol S. de R.L. de C.V. ("MLS").
2. Summary of Significant Accounting Policies
The accompanying condensed consolidated financial statements at June 30, 2020 and for the six-month periods ended June 30, 2020 and 2019 are unaudited, but include all adjustments, consisting of normal recurring entries, which we believe to be necessary for a fair presentation for the dates and periods presented. Interim results are not necessarily indicative of results for a full year. The financial statements should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2012,2019.
We disclosed in our consolidated financial statements for the year ended December 31, 2019, those accounting policies that we consider significant in determining our results of operations and financial position. There have been no material changes to, or in the application of, the accounting policies previously identified and described in our consolidated financial statements for the year ended December 31, 2019.
There have been no accounting pronouncements during the six months ended June 30, 2020, which we expect to have a material impact on our financial statements.
SUNSHINE SILVER MINING & REFINING CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share, option, and stock unit amounts)
3. Other Current Assets
| | June 30, 2020 | December 31, 2019 | |||||
|---|---|---|---|---|---|---|---|
Value added tax receivable | $ | 238 | $ | 213 | |||
Restricted cash | 466 | 466 | |||||
Prepaid expenses | 390 | 359 | |||||
Deposits and other | 29 | 30 | |||||
| | | | | | | | |
Total other current assets | $ | 1,123 | $ | 1,068 | |||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
4. Property, Plant and Equipment, net
| | June 30, 2020 | December 31, 2019 | |||||
|---|---|---|---|---|---|---|---|
Mineral properties(1) | $ | 18,203 | $ | 18,203 | |||
Plant and equipment | 13,621 | 13,621 | |||||
Land | 1,814 | 1,814 | |||||
Buildings, infrastructure and improvements | 16,798 | 16,798 | |||||
Furniture, fixtures and computers | 1,565 | 1,565 | |||||
| | | | | | | | |
Property, plant and equipment at cost | 52,001 | 52,001 | |||||
Less accumulated amortization | (23,010 | ) | (21,807 | ) | |||
| | | | | | | | |
Property, plant and equipment, net | $ | 28,991 | $ | 30,194 | |||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Mineral Properties
�� The Company conducts exploration activities on patented and unpatented mining claims in the United States and under mining concessions in Mexico.
The Company is required to make mineral and concession lease payments to various entities to secure the appropriate claims or surface rights. Certain of coststhese agreements also have royalty payments that are triggered when the Company produces and sells minerals. Since no Company assets are in production, the Company is not currently paying any royalties based on production or sales.
SUNSHINE SILVER MINING & REFINING CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share, option, and stock unit amounts)
5. Accounts Payable and Other Current Liabilities
| | June 30, 2020 | December 31, 2019 | |||||
|---|---|---|---|---|---|---|---|
Accounts payable | $ | 129 | $ | 270 | |||
Accrued expenses | 1,488 | 1,724 | |||||
Paycheck Protection Program loan | 567 | — | |||||
Accrued compensation | 865 | 1,471 | |||||
| | | | | | | | |
Total accounts payable and other current liabilities | $ | 3,049 | $ | 3,465 | |||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
In April 2020, the Company received $567 under a forgivable loan, bearing 1% annual interest, related to the remediationPaycheck Protection Program ("PPP"). The PPP, established as part of the United States' Coronavirus Aid, Relief and Economic Security Act ("CARES Act"), provides loans to qualifying businesses for amounts up to 2.5 times the average monthly payroll expenses of the qualifying business. The loans and accrued interest are forgivable as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels.
The Company believes it used the loan proceeds for purposes consistent with the PPP. While the Company currently believes that its use of the loan proceeds has met the conditions for forgiveness of the loan, the Company cannot guarantee forgiveness of the loan, in whole or in part. Should the loan not be forgiven, the Company intends to repay the loan within one year.
6. Related-Party Convertible Notes
The Company entered into convertible promissory note agreements with Electrum Silver US LLC, during the second quarter of 2020, to borrow up to $15,000. The convertible promissory notes bear a 5% annual interest rate. Upon the Company issuing common stock in a qualified financing, as defined, prior to April 19, 2023, the principal amount then outstanding and accrued but unpaid interest under the promissory notes will automatically convert into common stock of the Company at a price per share equal to the lesser of (A) 80% of the price per share of the shares that are issued and sold by the Company in the qualified financing or (B) $7.50 per share. The convertible promissory notes and any accrued but unpaid interest is due and payable on April 19, 2023, unless converted, exchanged or otherwise paid. As of June 30, 2020, the Company has borrowed $10,000 under the convertible promissory note agreements.
7. Related-Party Transactions
Service Agreement
The Company has a management agreement with the LGJV to provide certain consulting and administrative services. The Company received $0 and $1,050 from the LGJV under this agreement for the six months ended June 30, 2020 and 2019, respectively. The Company had receivables from the LGJV under this agreement of $6,150 and $4,050 as of June 30, 2020 and December 31, 2019, respectively. The Company also incurs certain LGJV costs that are subsequently reimbursed by the LGJV.
SUNSHINE SILVER MINING & REFINING CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share, option, and stock unit amounts)
8. Stockholders' Equity
Stock Option Transactions
The Company's stock options have a contractual term of 10 years and entitle the holder to purchase shares of the Company's common stock. The options granted to employees and LGJV personnel have a requisite service period of four years. The options granted to non-employee directors have a requisite service period of one year.
The Company granted 1,596,667 and 1,203,000 stock options during the six months ended June 30, 2020 and 2019, respectively.
Total unrecognized stock-based compensation expense as of June 30, 2020 was $7,751, which is expected to be recognized over a weighted average period of 2.1 years. The weighted-average grant-date fair value and stock-based compensation expense for the six months ended June 30, 2020 and 2019 are summarized as follows:
| | Six Months Ended June 30, | ||||||
|---|---|---|---|---|---|---|---|
| | 2020 | 2019 | |||||
Weighted-average grant-date fair value | $ | 3.31 | $ | 3.50 | |||
Stock based compensation expense | $ | 2,118 | $ | 1,729 | |||
Stock option activity for the six months ended June 30, 2020 is summarized in the following tables:
Director and Employee Options | Shares | Weighted-Average Exercise Price | |||||
|---|---|---|---|---|---|---|---|
Outstanding at December 31, 2019 | 7,102,361 | $ | 7.20 | ||||
Granted | 1,596,667 | $ | 6.00 | ||||
Exercised | — | $ | — | ||||
Forfeited | — | $ | — | ||||
| | | | | | | | |
Outstanding at June 30, 2020 | 8,699,028 | $ | 6.98 | ||||
| | | | | | | | |
Vested at June 30, 2020 | 5,842,395 | $ | 7.63 | ||||
| | | | | | | | |
LGJV Personnel Options | Shares | Weighted-Average Exercise Price | |||||
|---|---|---|---|---|---|---|---|
Outstanding at December 31, 2019 | 109,190 | $ | 3.68 | ||||
Granted | — | $ | — | ||||
Exercised | — | $ | — | ||||
Forfeited | — | $ | — | ||||
| | | | | | | | |
Outstanding at June 30, 2020 | 109,190 | $ | 3.68 | ||||
| | | | | | | | |
Vested at June 30, 2020 | 104,190 | $ | 3.64 | ||||
| | | | | | | | |
SUNSHINE SILVER MINING & REFINING CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share, option, and stock unit amounts)
8. Stockholders' Equity (Continued)
Director Share Unit Transactions
DiSUs are awarded to Directors at the discretion of the Board of Directors. The DiSUs are fully vested on the grant date and each DiSU entitles the holder to receive one share of the Company's common stock upon departure from the Company. The DiSU fair value equaled the Company's common stock fair value on the grant date.
At June 30, 2020, there were 365,421 DiSUs outstanding. The Company granted 10,206 and 55,963 DiSUs during the six months ended June 30, 2020 and 2019, respectively.
9. Asset Retirement Obligations
The Company recorded accretion expense related to the asset retirement obligation ("ARO") of $55 and $47 for the six months ended June 30, 2020 and 2019, respectively. The following table summarizes activity in the Company's ARO:
| | June 30, 2020 | December 31, 2019 | |||||
|---|---|---|---|---|---|---|---|
Balance, beginning of period | $ | 1,439 | $ | 1,337 | |||
Accretion expense | 55 | 102 | |||||
| | | | | | | | |
Balance, end of period | $ | 1,494 | $ | 1,439 | |||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
The Company is required to provide the applicable governmental agencies with financial assurances related to its closure and reclamation obligations. At June 30, 2020 and December 31, 2019, the Company had restricted cash in the form of a certificate of deposit totaling $275 as collateral for a letter of credit issued by a financial institution as security to a governmental agency for certain of the Company's reclamation obligations.
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. Financial assets and liabilities are 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.
SUNSHINE SILVER MINING & REFINING CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share, option, and stock unit amounts)
10. Fair Value Measurements (Continued)
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.
Financial Assets and Liabilities
At June 30, 2020 and December 31, 2019, the Company's financial instruments consist of cash and cash equivalents, restricted cash, receivables, accounts payable and other current liabilities. The carrying amounts of these financial instruments approximate fair value due to their short maturities.
Non-Financial Assets and Liabilities
The Company discloses and recognizes its non-financial assets and liabilities, such as ARO, at fair value on a non-recurring basis. The estimated fair value for these non-financial liabilities are classified as Level 3 of the fair value hierarchy, as the valuation are 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 as 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 financial statements when it is at least reasonably possible that a material loss could be incurred.
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.
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 LGP development, with a maturity date of December 29, 2027. Interest on the Term Loan accrues 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. The Company is required to pay an arrangement fee on the borrowing, calculated as 70%, of 1% of the outstanding principal balance, two business days prior to June 30 and December 31 each fiscal year until maturity, commencing after the initial
SUNSHINE SILVER MINING & REFINING CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share, option, and stock unit amounts)
11. Commitments, Contingencies and Guarantees (Continued)
drawdown which occurred in July 2018. The Term Loan also requires additional principal payments equal to 70% of excess cash flows (as defined). As of June 30, 2020, the LGJV had $222,783 outstanding under 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 LGP 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 LGP's substantial completion. If the Company's 70% portion of 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.
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. The conversion of the remaining principal and interest increased Dowa's ownership in the LGJV entities to 48.5%. At June 30, 2020, the ownership of the LGJV entities is 51.5% SSMRC and 48.5% Dowa. Due to the LGJV ownership dilution, the Company recognized a dilution loss on affiliates of $11,231 in May 2019. SSMRC has until June 30, 2021 to repurchase the 18.5% interest for SSMRC's unpaid portion of the Dowa MPR loan amount, plus a 70% penalty and any Dowa holding costs of this incremental interest.
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 LGP. Interest on this loan accrues daily at LIBOR plus 3.0% and all outstanding principal and interest matures on June 28, 2021. The Company is 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 June 30, 2020, the LGJV had $60,000 outstanding under the WCF.
The Company has guaranteed 70% of the outstanding principal and accrued interest of the Term Loan and the WCF in the event of default by the LGJV. The Company has guaranteed the payment of all obligations, including accrued interest, under the LGJV equipment loan agreements
12. Segment Information
The Company operates in a single industry as a corporation engaged in the acquisition, exploration and development of silver mineral properties. The Company has mineral property interests in the U.S. and Mexico. The Company's reportable segments are based on the Company's mineral interests and management structure, and include the U.S., Mexico, and Corporate segments. The U.S. segment is improving the mining infrastructure, maintaining the Sunshine Mine fire. These costs are included as pre-development costsfacilities, and maintaining the
SUNSHINE SILVER MINING & REFINING CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share, option, and stock unit amounts)
12. Segment Information (Continued)
Sunshine Big Creek Refinery. The Mexico segment engages in the statementdevelopment and exploration on the Company's Mexican mineral properties.
| | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | U.S. | Mexico | Corporate | Total | U.S. | Mexico | Corporate | Total | |||||||||||||||||
Exploration | $ | 216 | $ | 382 | $ | — | $ | 598 | $ | 158 | $ | 369 | $ | — | $ | 527 | |||||||||
Pre-development | 1,048 | — | — | 1,048 | 1,139 | 1 | — | 1,140 | |||||||||||||||||
General and administrative | 877 | 252 | 2,128 | 3,257 | 1,048 | 191 | 1,450 | 2,689 | |||||||||||||||||
Amortization | 1,186 | — | 17 | 1,203 | 1,158 | 62 | 18 | 1,238 | |||||||||||||||||
Arrangement fees | — | — | 2,285 | 2,285 | — | — | 895 | 895 | |||||||||||||||||
Equity loss in affiliates | — | 21,516 | — | 21,516 | — | 311 | — | 311 | |||||||||||||||||
Dilution loss on affiliates | — | — | — | — | — | 11,231 | — | 11,231 | |||||||||||||||||
Net other loss (income) | (2 | ) | 24 | 36 | 58 | (4 | ) | 4 | (9 | ) | (9 | ) | |||||||||||||
Capital expenditures | — | — | — | — | 427 | — | — | 427 | |||||||||||||||||
Total assets | 30,156 | 34,346 | 71,646 | 136,147 | 32,430 | 68,953 | 53,905 | 155,288 | |||||||||||||||||
13. Investment in Affiliate
During the six months ended June 30, 2020 and 2019, the Company recognized a $21,516 and $311 loss, respectively, on its investment in the LGJV Entities, representing its ownership share of operations.the LGJV Entities' operational results. The Company has filed a claim with its insurance providerscombined financial position and results of operations of the LGJV
SUNSHINE SILVER MINING & REFINING CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share, option, and stock unit amounts)
13. Investment in Affiliate (Continued)
Entities as of June 30, 2020, and December 31, 2019 and for the costs incurred with respectsix months ended June 30, 2020 and 2019 are as follows:
LOS GATOS JOINT VENTURE
COMBINED BALANCE SHEETS (UNAUDITED)
(in thousands)
| | June 30, 2020 | December 31, 2019 | |||||
|---|---|---|---|---|---|---|---|
ASSETS | |||||||
Current Assets | |||||||
Cash and cash equivalents | $ | 5,690 | $ | 1,302 | |||
Receivables | 4,443 | 5,655 | |||||
Inventories | 10,641 | 11,374 | |||||
VAT receivable | 45,576 | 50,184 | |||||
Other current assets | 4,141 | 1,672 | |||||
| | | | | | | | |
Total current assets | 70,492 | 70,187 | |||||
Non-Current Assets | |||||||
Mine development, net | 188,896 | 182,601 | |||||
Property, plant and equipment, net | 204,619 | 216,131 | |||||
| | | | | | | | |
Total non-current assets | 393,515 | 398,732 | |||||
Total Assets | $ | 464,007 | $ | 468,919 | |||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
LIABILITIES AND OWNERS' CAPITAL | |||||||
Current Liabilities | |||||||
Accounts payable and accrued liabilities | $ | 47,020 | $ | 43,287 | |||
Related party payable | 10,398 | 6,875 | |||||
Accrued interest | 45 | 885 | |||||
Unearned revenue | 5,172 | — | |||||
Related party advance | 18,904 | — | |||||
Equipment loans | 6,955 | 6,948 | |||||
| | | | | | | | |
Total current liabilities | 88,495 | 57,995 | |||||
Non-Current Liabilities | |||||||
Dowa Term Loan | 219,087 | 217,796 | |||||
Working Capital Facility | 60,000 | 60,000 | |||||
Equipment loans | 9,445 | 12,916 | |||||
Reclamation obligations | 11,738 | 11,314 | |||||
| | | | | | | | |
Total non-current liabilities | 300,270 | 302,026 | |||||
Owners' Capital | |||||||
Capital contributions | 237,905 | 237,905 | |||||
Paid-in capital | 12,108 | 7,400 | |||||
Accumulated deficit | (174,771 | ) | (136,406 | ) | |||
| | | | | | | | |
Total owners' capital | 75,242 | 108,899 | |||||
| | | | | | | | |
Total Liabilities and Owners' Capital | $ | 464,007 | $ | 468,919 | |||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
SUNSHINE SILVER MINING & REFINING CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share, per share, option, and stock unit amounts)
13. Investment in Affiliate (Continued)
LOS GATOS JOINT VENTURE
COMBINING STATEMENT OF INCOME (LOSS) [UNAUDITED]
(in thousands)
| | Six Months Ended June 30, | ||||||
|---|---|---|---|---|---|---|---|
| | 2020 | 2019 | |||||
Sales | $ | 37,160 | $ | — | |||
Expenses | |||||||
Cost of sales | 28,272 | — | |||||
Royalties | 29 | — | |||||
Exploration | 408 | — | |||||
General and administrative | 4,650 | 34 | |||||
Depreciation, depletion and amortization | 21,260 | — | |||||
Other | 3,416 | — | |||||
| | | | | | | | |
| 58,035 | 34 | ||||||
Other (income) expense | |||||||
Interest expense | 6,943 | — | |||||
Arrangement fee | 4,709 | — | |||||
Accretion expense | 424 | — | |||||
Other (income) expense | (108 | ) | 562 | ||||
Foreign exchange loss (gain) | 5,522 | (176 | ) | ||||
| | | | | | | | |
| 17,490 | 386 | ||||||
| | | | | | | | |
Net income (loss) | $ | (38,365 | ) | $ | (420 | ) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
For the six months ended June 30, 2020, the Company and Dowa contributed $5,148 and $13,756, respectively in the form of advances to the fire. The Company does not expectLGJV to incur any significant additional cost relatedsupport limited operations during the temporary, government-mandated COVID-19 suspension. Effective July 14, 2020, the advances from SSMRC and Dowa were converted to LGJV capital contributions and $9,448 of LGJV payables to SSMRC were converted to SSMRC capital contributions to the fire remediation.LGJV in lieu of additional SSMRC pro-rata cash contributions.
14. Subsequent Events
On August 10, 2020, SSMRC borrowed an additional $2,000 under the convertible promissory notes.
Through and includingUntil , 2013 (the 25th day after the date of this prospectus), federal securities law may require2020, all dealers that effect transactions in our common stock,these securities, whether or not participating in this offering, may be required to deliver a prospectus. This requirement is in addition to the dealers’dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13.Other Expenses of Issuance and Distribution.
| Amount To Be Paid | ||||
Registration fee | $ | 29,025 | ||
FINRA filing fee | 25,500 | |||
NYSE listing fee | * | |||
Toronto Stock Exchange listing fee | * | |||
Transfer agent’s fees | * | |||
Printing and engraving expenses | * | |||
Legal fees and expenses | * | |||
Accounting fees and expenses | * | |||
Blue sky fees and expenses | * | |||
Miscellaneous | * | |||
Total | $ | * | ||
|
| |||
| Amount to be Paid | ||||
|---|---|---|---|---|
SEC registration fee | $ | * | ||
FINRA filing fee | * | |||
NYSE listing fee | * | |||
TSX listing fee | * | |||
Transfer agents' fees | * | |||
Printing and engraving expenses | * | |||
Legal fees and expenses | * | |||
Accounting fees and expenses | * | |||
Blue sky fees and expenses | * | |||
Miscellaneous | * | |||
| | | | | |
Total | $ | * | ||
| | | | | |
| | | | | |
| | | | | |
Each of the amounts set forth above, other than the RegistrationSEC registration fee and the FINRA filing fee, is an estimate.
Item 14.Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law, or the DGCL, provides that a corporation may indemnify directors and officers as well as other employees and individuals against expenses (including attorneys’attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with any threatened, pending or completed actions, suits or proceedings in which such person is made a party by reason of such person being or having been a director, officer, employee or agent to such corporation. The DGCL provides that Section 145 is not exclusive of other rights to which those seeking indemnification may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise. The Registrant’sRegistrant's Amended and Restated Certificate of Incorporation provides for indemnification by the Registrant of its directors, officers and employees to the fullest extent permitted by the DGCL. The Registrant intends to enter into indemnification agreements with each of its directors and executive officers to provide these directors and officers additional contractual assurances regarding the scope of the indemnification set forth in the Registrant's Amended and Restated Certificate of Incorporation and to provide additional procedural protections. These agreements, among other things, will require the Registrant to indemnify each director and executive officer to the fullest extent permitted by Delaware law, including indemnification for expenses such as attorneys' fees, judgments, fines and settlement amounts incurred by the director or executive officer in any action or proceeding, including any action or proceeding by or in right of the Registrant, arising out of the person's services as a director or executive officer.
Section 102(b)(7) of the DGCL permits a corporation to provide in its certificate of incorporation that a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director’sdirector's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for unlawful payments of dividends or unlawful stock repurchases, redemptions or other distributions, or (iv) for any
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transaction from which the director derived an improper personal benefit. The Registrant’sRegistrant's Amended and Restated Certificate of Incorporation provides for such limitation of liability.
The Registrant intends to enter into indemnification agreements with each of its directors and executive officers. These agreements, among other things, will require the Registrant to indemnify each director and executive officer to the fullest extent permitted by Delaware law, including indemnification for expenses such as attorneys’ fees, judgments, fines and settlement amounts incurred by the director or executive officer in any action or proceeding, including any action or proceeding by or in right of the Registrant, arising out of the person’s services as a director or executive officer.
The Registrant maintains standard policies of insurance under which coverage is provided (a) to its directors and officers against loss arising from claims made by reason of breach of duty or other wrongful act, and (b) to the Registrant with respect to payments which may be made by the Registrant to such officers and directors pursuant to the above indemnification provision or otherwise as a matter of law.
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The proposed form of Underwriting Agreement (to be filed as Exhibit 11.1 to this Registration Statement) will provide for indemnification of directors and officers of the Registrant by the underwriters against certain liabilities.
Item 15.Recent Sales of Unregistered Securities.
Since During the past three years, before the date of the initial filing of this Registration Statement, the Registrant has sold securities without registration under the Securities Act of 1933, as amended (the “Securities Act”), as described below. None of these transactions involved any underwriters or any public offerings, and we believe that each of these transactions was exempt from the registration requirements of the Securities Act pursuant to Section 3(a)(9), Section 4(2), Regulation D or Rule 701 of the Securities Act.
During the fiscal year ended December 31, 2008, we did not issue any unregistered securities.
During the fiscal year ended December 31, 2009 we issued the following unregistered securities for the consideration listed:
1. On October 2, 2009, Los Gatos Ltd. converted 12,000 ordinary shares held by CGT Management Ltd., or CGT, to 1,200,000 preferred shares. 105,416,318 preferred shares of Los Gatos Ltd. were also issued to CGT in payment of the then outstanding advance of $527,152 and a reduction of long-term debt payable to CGT of $539,011.
2. On October 2, 2009, Los Gatos Ltd. issued 1,383,682 ordinary shares to CGT in payment of long term debt payable to CGT of $13,837.
3. During the period October 2, 2009 through December 31, 2009, Los Gatos Ltd. issued 18,997,933 ordinary shares in payment for services, as follows: 1) 12,000,000 shares to related individuals; 2) 2,226,615 shares to two vendors; and 3) 4,771,318 shares to Tigris Financial (International) L.P. In addition, individuals associated with Electrum purchased 11,425,956 ordinary shares of Los Gatos Ltd. at a price of $0.01 per share.
4. On October 14, 2009, Los Gatos Ltd. entered into stock option agreements with various individuals and entities that agreed to serve on its advisory board. The stock option agreements provided for the purchase of 21,661,788 ordinary shares of Los Gatos Ltd. with a stated exercise price of $0.36 per share.
During the fiscal year ended December 31, 2010, we issued the following unregistered securities for the consideration listed:
1. On June 30, 2010, Los Gatos Ltd. issued 174,949 ordinary shares of Los Gatos Ltd. for $1,749 to an employee of Tigris Financial Group Ltd.
2. In December 2010, options to acquire 14,934,227 ordinary shares of Los Gatos Ltd. were exercised by CGT, of which 14,616,139 shares were acquired from a company serving on Los Gatos Ltd.’s Advisory Board, at an exercise price of $0.36 per share resulting in $5.4 million of capital contributions through reduction in related-party debt.
Since January 1, 2011, we have issued and sold the following unregistered securities:securities described below without registering the securities under the U.S. Securities Act.
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2. On March 1, 2011, in connection with the merger of Los Gatos Ltd. into the Registrant (the “Merger”), the 6,727,561 options outstanding for the purchase of Los Gatos Ltd. ordinary shares were converted into options to purchase 1,043,938sold 2,222,222 shares of common stock of the Company at $2.32 per share. Pursuant to the Merger, all outstanding ordinaryone or more private equity investment funds, institutional investors and other persons for $9,999,999.
3. During the years ended December 31, 2011stock to one or more private equity investment funds, institutional investors and 2010, the members of Precious Metals Opportunities LLC contributed $1.0 millionother persons for $25,000,002.
4. On March 9, 2011, the Company granted 38,600 employee stock options, with an exercise price of $13.825 per option, to Roger Johnson.
5. On May 4, 2011, the Company granted 125,000 employee stock options, with an exercise price of $27.65 per option, to Stephen Orr.
6. Between March 1, 2011 and June 1, 2011, we also issued in the aggregate 11,843,287 unregistered securities to 13 individuals or entities, including Liberty Metals & Mining Holdings, LLC and certain of the Registrant’sour directors and officers (or their affiliates) for $465,858.
The recipientsoffers, sales and issuances of the securities described in these transactions represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof.
7. Since the Merger, through June 30, 2011, holders of 885,990 options exercised their right to purchase sharespreceding table were exempt from registration either (i) under Section 4(a)(2) of the Registrant’s common stock atU.S. Securities Act and the rules and regulations promulgated thereunder in that the transactions were between an exercise priceissuer and sophisticated investors or members of $2.32 per share, resultingits senior executive management and did not involve any public offering within the meaning of Section 4(a)(2), (ii) under Regulation S promulgated under the U.S. Securities Act in proceeds of $2.1 million.
8. On July 18, 2011,that offers, sales and issuances were not made to persons in the Company granted 100,000 employee stock options, with an exercise price of $27.65 per option,United States and no directed selling efforts were made in the United States, (iii) under Rule 144A under the U.S. Securities Act in that the shares were offered and sold by the initial purchasers to Jeffrey Reeser.
9. On August 8, 2011,qualified institutional buyers or (iv) under Rule 701 promulgated under the Company granted 150,000 employee stock options, with an exercise price of $27.65 per option,U.S. Securities Act in that the transactions were under compensatory benefit plans and contracts relating to John Galassini.
10. On October 30, 2012, the Company granted 1,494,682 options, with an exercise price of $13.83, to directors, executives and employees.
11. On February 16, 2013, the Company granted 1,512,878 options, with an exercise price of $13.83, to directors, executives and employees.compensation.
Item 16.Exhibits and Financial Statement Schedules.
(a) The followinglist of exhibits are filed as partset forth under "Exhibit Index" at the end of thisthe is Registration Statement:Statement is incorporated by reference.
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(b) No financial statement schedules are provided because the information called for is not required or is shown either in the financial statements or the notes thereto.
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Item 17.UndertakingsUndertakings.
The undersigned Registrant hereby undertakes:
(a) Insofar as indemnification for liabilities arising under the U.S. Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions referenced in Item 14 of this Registration Statement, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the U.S. Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the U.S. Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes:undertakes that:
(a) To provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.
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(b)(a) For purposes of determining any liability under the U.S. Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrantregistrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the U.S. Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective.
(c) (b) For the purpose of determining any liability under the U.S. Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York,Denver, State of New York,Colorado, on the 1st day of March, 2013.October, 2020.
| SUNSHINE SILVER MINING & REFINING CORPORATION | ||||||
By: | /s/ | |||||
| Name: | Stephen Orr | |||||
| Title: |
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KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Stephen Orr and Roger Johnson and each of them, their true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for them and in their name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement and any and all additional registration statements pursuant to Rule 462(b) of the Securities Act of 1933, and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto each said attorney-in-fact and agents full power and authority to do and perform each and every act in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or either of them or their or his or her substitute or substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
Signature | Title | Date | |||
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| /s/ STEPHEN ORR Stephen Orr |
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/s/ ROGER JOHNSON Roger Johnson | Chief Financial Officer (principal financial officer and principal accounting officer) | October 1, 2020 | |||
Thomas S. Kaplan | Chairman of the Board of Directors | October 1, | |||
/s/ JANICE STAIRS Janice Stairs | Lead Director | October 1, 2020 | |||
/s/ JEB BURNS Jeb Burns | Director | October 1, 2020 | |||
Ali Erfan |
Director | October 1, | |||
/s/ IGOR GONZALES Igor Gonzales | Director | October 1, 2020 | |||
/s/ KARL HANNEMAN Karl Hanneman | Director | October 1, | |||
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II-8
Signature | Title | Date | ||
|---|---|---|---|---|
Igor Levental | ||||
| Director | ||||
/s/ DAVID PEAT David Peat |
Director | October 1, 2020 |
II-9
II-7
EXHIBIT INDEX
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