Gatos Silver - Q1 2024

Executive Summary

• Solid operations but mixed financials: LGJV revenue rose 3% year/year to $72.2M while net income fell 20% to $10.2M on lower realized prices and higher costs; Gatos Silver reported EPS of $0.04 and net income of $2.5M, up from $0.01 a year ago.
• Throughput beat and guidance bias higher: CLG averaged >3,200 tpd in Q1 (March >3,300 tpd). Management now expects 2024 silver and AgEq production in the top half of prior ranges and AISCs in the lower half of ranges.
• Cash generation and distributions remain strong: LGJV free cash flow was $25.5M in Q1; Gatos ended April with $85.4M cash (debt free) after a $17.5M April distribution from LGJV; $50M revolver remains undrawn.
• Estimate context: S&P Global consensus data for GATO’s Q1 2024 was unavailable via our feed; vs. estimates not shown.
• Near-term stock catalysts: Q3 2024 life-of-mine (LOM) plan update with potentially higher sustainable throughput, a copper circuit decision, and continued distributions/guidance bias to the top/lower halves of ranges.

What Went Well and What Went Wrong

• What Went Well

  • Record operating rates: “averaged a mill throughput rate of over 3,200 tonnes per day” in Q1; March averaged >3,300 tpd; productivity initiatives and mine plan optimization advancing.
  • Guidance skewed favorable: Management expects 2024 silver/AgEq production in the “top half” of ranges and AISC in the “lower half,” reflecting throughput outperformance despite FX/inflation headwinds.
  • Cash generation/distributions: LGJV generated $25.5M FCF and distributed $30M in Feb and $25M in April; Gatos cash was $85.4M on April 30, debt free.

• What Went Wrong

  • Cost pressure and FX headwind: By-product AISC rose to $10.08/oz (from $6.11) on lower realized prices and a stronger Mexican peso; cost of sales up 18% y/y with higher tonnes processed/sold.
  • Profitability down y/y at JV: LGJV net income fell 20% to $10.2M; EBITDA down 11% to $35.1M on pricing and cost dynamics; provisional revenue adjustment less negative than Q1'23 but still a drag.
  • Higher parent-level G&A (partly nonrecurring): Gatos Silver G&A rose to $7.0M, including $1.7M non-cash SBC and higher legal fees (not expected to recur beyond 2024).

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by. Welcome to Gatos Silver's First Quarter 2024 Results Conference Call. Presenting today will be Dale Andres, CEO of Gatos Silver, and André van Niekerk, Chief Financial Officer. We will conclude today's session with a question and answer period, where other members of the Gatos Silver management team will be available. If you would like to ask a question during this time, simply press Star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. At this time, all participant lines have been placed on mute for the duration of the presentation to prevent any background noise. Turning your attention to slide 2, please note today's call contains forward-looking statements. Various risks and uncertainties may cause actual results to vary.

Gatos Silver does not assume the obligation to update any forward-looking statements. I would now like to turn the call over to Dale Andres. Please go ahead.

Dale Andres (CEO)

Thank you, operator, and good morning, everyone. Turning to slide 3, our strong operating performance and cash flow generation continued in the first quarter of 2024. The Los Gatos Joint Venture set yet another record mill throughput rate. During the quarter, we averaged a mill throughput rate of over 3,200 tons per day, and we are well on our way to our medium-term target of sustainable production at 3,500 tons per day. Our first quarter production puts us in a strong position for the remainder of the year, and the Cerro Los Gatos production is expected in the top half of our guidance range.

As a result of the strong operating performance this quarter, our All-in Sustaining Costs metrics for the full year are expected to remain in the lower half of the guidance range, despite the strengthening peso and inflationary pressures.

Gatos Silver continues to receive regular cash distributions from the joint venture. Andre will talk about this in more detail, but I do want to highlight the Los Gatos Joint Venture's free cash flow of over $25 million in the first quarter of 2024, and continuing distributions received in April of this year. Gatos Silver had a cash balance of over $85 million at the end of April. We are on track to update our life of mine plan in the third quarter this year and are aiming to increase throughput and also extend the mine life. Importantly, we have now started to ramp up exploration efforts on both near mine and other targets in the highly prospective Los Gatos District. Turning to slide 4.

As mentioned before, mill throughput in the quarter was over 3,200 tons per day, with the higher throughput offset by lower silver grades as expected in the mine plan. Production was similar compared to the comparable quarter in 2023, with silver at 2.4 million oz and silver equivalent production, which includes zinc, lead, and gold, and now starting copper soon at 3.7 million oz for the quarter. In March, we achieved an average mill throughput rate of over 3,300 tons per day, which was the best monthly performance on record. With the minor modifications to the mill made this year, we believe the current mill capacity is already at the 3,500 ton per day rate on a calendar day basis.

However, to achieve these levels through the mill, we need to first show that we can sustain and then increase mining rates, which continue to be the bottleneck. We have various initiatives underway to increase those mining rates, including rebuilding the core mining fleet, other maintenance improvement projects, optimizing mine plans and schedules to support the higher rates, and a major focus on operational execution, including short interval control. Cost of sales for the first quarter increased by 18% compared to the comparable quarter last year, but this was primarily due to the 12% increase in tons processed and a 17% increase in the concentrate tons sold. Cost of sales were also impacted by the continued strengthening of the Mexican peso during the quarter.

All-in Sustaining Costs per payable ounce of silver, and that's after byproduct credits, were just over $10 an ounce, compared to just over $6 an ounce in the first quarter of 2023, and that is in the lower half of our guidance range for 2024. We now expect full year production to be in the upper half of our guidance range for 2024, and I'm speaking to slide 5 now. As you can see in the table, silver and silver equivalent production are at 27% and 26% respectively, compared to the midpoint of guidance, and our unit cost metrics are tracking 4% below midpoint in the first quarter.

Based on the strong performance in the first quarter, we now expect throughput rates at the Cerro Los Gatos, mine to average in the top half of our 3,000-3,300 tons per day guidance range in 2024 for the full year. We still expect exploration and definition drilling spend to be at $18 million for 2024 and our sustaining capital expenditures to be approximately $45 million, and that's with the majority of that spend on underground development, with a continued focus on opening up the southeast area and some of those mine equipment rebuilds and other infrastructure projects, as I mentioned. I'll now turn the call over to Andre to present our financial results.

André van Niekerk (CFO)

Thank you, Dale. Good morning, everyone. The 70% owned Los Gatos Joint Venture strong operating performance is underscored by yet another quarter of robust cash flow generation. Cash flow provided by operations was approximately $37 million. The joint venture generated free cash flow of $25.5 million this quarter, 14% higher than the $22.3 million in Q4 2023, and 11% lower than the $28.7 million in Q1 2023. The drop from the comparable quarter last year was primarily due to lower realized metal prices and higher operating costs than in Q1 2023, associated largely with higher mining and processing rates. Cash flow used in investing activities was $11.8 million in Q1 2024, and similar to the $11.4 million in Q1 2023.

Of that amount, resource development drilling totaled $3.2 million for the quarter, with most of the spending focused on the infill drilling of the Southeast Deeps. As a result of the continued strong free cash flow generation in the first quarter, the joint venture made a capital distribution of $30 million in February. As a reminder, a total of $85 million was distributed in 2023. Subsequent to the end of the quarter, in April, the joint venture made a further quarterly capital distribution to the partners of $25 million. Now turning to Slide 7 to look at the financial results of the Los Gatos joint venture for the quarter. Revenue increased to $72.2 million in the first quarter of 2024. Higher volumes of metal sold were offset by significantly lower silver, zinc, and lead prices.

The provisional revenue adjustment was a $900,000 negative adjustment in this quarter, compared to a $13.6 million negative adjustment in Q1 2023. Cost of sales increased by 18%, primarily due to higher mining and processing costs as a result of a 12% increase in mill throughput and a 17% increase in the tonnage of concentrate sold. Cost of sales were further impacted by the strengthening of the Mexican peso against the US dollar, which was partly offset by productivity improvement and cost reduction initiatives as part of our continuous improvement program. Depreciation, depletion, and amortization expense decreased by approximately 3%, primarily due to the increase in the mineral reserves and the extension of the mine life, offset by additional DD&A on recent capital additions.

The income tax expense of $4.8 million for the quarter was 20% lower than in Q1 2023, primarily due to lower taxable income for the period. Finally, the LGJV recorded net income of approximately $10.2 million for the quarter, 20% lower than in Q1 2023. Moving on to Slide 8 to review the financial results for Gatos Silver. Gatos Silver recorded net income of $2.5 million, or $0.04 per basic and diluted share. That's up 203% from Q1 2023. Equity income in affiliates increased to $7.3 million, primarily due to a reduction in the obligation under the priority distribution agreement with Dowa, partly offset by the lower equity income from the LGJV.

Corporate G&A was approximately $1.4 million higher than in Q1 2024 than in Q1 2023, mainly due to a $900,000 increase in non-cash stock-based compensation expense as a result of 2023 and 2024 equity grants, and a $600,000 increase in non-recurring legal fees. Turning to Slide 9. As was mentioned earlier, the joint venture paid a capital distribution of $30 million to its partners, Gatos Silver and Dowa, during the first quarter, of which we received $21 million. As a result, Gatos Silver ended the first quarter with a cash balance of $70.6 million.

After the end of the quarter in April, the LGJV made another capital distribution of $25 million, of which we received $17.5 million, bringing the company's cash balance to $85.4 million at April 30, 2024. The company, along with its insurers, has also fully funded both the U.S. and Canadian class action lawsuits, and the cash balance at the end of April is after our portion of the payments have been made. The distribution of the settlement amounts is now pending final court approval, which we expect by the end of Q2. The LGJV ended the first quarter with a cash balance of $29.8 million and had a cash balance of $20 million at April 30, 2024. Both GSI and the LGJV remain debt-free, and the company's $50 million revolver remains in place.

I will now hand it back to Dale.

Dale Andres (CEO)

Thanks, Andre. Turning to slide 10, we wanted to highlight how our business improvement initiatives and increased throughput are delivering results at the mine. Site operating costs per ton have decreased by 9% over the past three years, despite inflationary pressures, including the 5.5% per year increase in labor costs and a substantial strengthening of the Mexican peso. Our numerous continuous improvement and cost optimization programs also contribute to the lower cost per ton. On the design side, we have successfully switched more of our mining areas from cut and fill to long-hole stoping, including transverse stopes, where the geometry and ground conditions are suitable, which is a more cost-effective mining method.

We are continuing our equipment rebuild program this year and working on our underground productivity initiatives to work towards first sustainably mining at the 3,200-3,300 tons per day rate, which we're currently achieving, and then to further extend that towards the 3,500 tons per day in the medium term. Turning to slide 11, we are on track to provide our updated life of mine plan and mineral reserves in the third quarter of 2024, this year. Targeting the throughput rate in the plan, the current plan averages 2,950 tons per day, and we're looking at increasing that. Even with mining more of our mineral reserves faster, we still expect an extension to the life of mine.

The new life of mine plan will be based on an additional 66 kilometers of drilling that's been completed over the past 12-month period, up to the end of the first quarter, and we've now made that data cutoff. In the Southeast Deeps conversion drilling that we did between that April 2023 to end of March 2024 timeframe, was done on 50-meter spacing, targeting the higher grade trends in the zone. We still have two drills dedicated to further infill drilling and resource expansion on the Southeast Deeps. On the recovery side of things, we are completing detailed engineering for a copper separation circuit and anticipate making a decision in the third quarter of this year. We are also evaluating technology and various options for increasing the recovery of silver, gold, and zinc.

Turning to slide 12, this figure shows a few of the key targets that are within a few kilometers of the existing mine workings and potentially accessible from existing underground infrastructure. Now that we have passed that database cut off for this year's reserve update, we are excited by the opportunity to ramp up the exploration work on the rest of our 103,000-hectare land package. After the end of the quarter, we announced the appointment of Chad Juhas, our new Vice President of Exploration and Technical Services, and we are really pleased to have Chad on board to guide these critical parts of our business. First up, we are starting on targets within three to four kilometers of the mine operations, as it'll be easiest to bring anything we find here into production.

We do have two rigs working now towards the southeast of the mine, in the Portigueño area, and the first holes stepped along the Gatos Fault and are now stepping south along the Dragon Fault towards the Thule Fault and Roja Fault targets. A third greenfields rig will be moving on to the Northwest Deeps target and Central Deeps target further out from the Cerro Los Gatos mine in the basin within the next few weeks. We will be getting the drill rigs further out from Cerro Los Gatos and the surrounding mine later in the year, with some very prospective targets in the San Luis area, about five kilometers northwest of the mine, and there are a number of targets in the Lince area, about 20 kilometers to the northwest.

On slide 13, and in summary, we continue to safely drive mill throughput increases together with productivity improvements and cost optimization, which is a core part of our business and operating strategy. We remain focused on developing a new life of mine plan by the third quarter of this year, which incorporates the Southeast Deeps conversion drilling, together with other value-enhancing initiatives, including higher throughput rates and the copper circuit. And we continue to be very excited as we start to increase our near mine and district drilling in the large and highly prospective district, including Portigueño and the Northwest and Central Deeps, which I discussed.

And importantly, we continue to generate strong operating margins and cash flow, with regular distributions expected from the Los Gatos Joint Venture and a growing cash balance. I will now hand it back to the operator for questions.

Operator (participant)

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Cosmos Chiu with CIBC.

Cosmos Chiu (Executive Director)

Hi. Thanks, Dale and Andre and team. As I read, you know, certainly a lot of exploration upside here. But my question is on Southeast Deeps, I guess. I was reading up on it, and as you mentioned in your press release from early April, that silver grade decreases with higher by-product credits when you look at Southeast Deeps versus Central Deeps, the Central Zone and the Northwest zones. So, you know, right now, your reserve grade is sitting at about 217 gram per ton. What can we expect, to the extent that you can, you know, kind of describe it, what can we expect as we, you know, come through and with your life of mine plan that's getting updated in Q3?

Dale Andres (CEO)

Yeah, thanks for the question.

Cosmos Chiu (Executive Director)

Hi, Dale

Dale Andres (CEO)

Cosmos. And, yeah, I'm gonna ask Tony to provide some color on that, but I will say we're right in the process of, you know, doing the resource modeling work, and incorporating those drill results in the Southeast Deeps. And so I don't think there's a lot we can say on a specific, you know, grade target. But, Tony, do you wanna comment further, please?

Tony Scott (VP Exploration and Technical Services)

Yeah. Hey, Cosmos. Unfortunately-

Dale Andres (CEO)

Hi, Tony

I'm probably gonna. Yeah, thanks for the question. I'll probably just echo what Dale said. Like, I mean, we've, like, we've really just kicked it off, so, like, we can't comment until we've actually done the work, and there's a lot of things that go into that in terms of where we end up on stope design, where, like, how much dilution gets out of it. There's a whole bunch of stuff. I can really just sort of recommend you go have a look at those. I mean, I'm sure you have the exploration press releases that we put out. I mean, what you can see from that, we, and we report those effectively, sort of similar cutoff to what we use for the reserve work. So what you'll see from that is that it's higher base metals.

There's a lot of good zinc and lead and particularly copper in those, but the silver is lower. So, I mean, all I can do to guide you is to have a look at those, but we can't sort of commit to final numbers until we've actually done all the work.

Cosmos Chiu (Executive Director)

Of course. And maybe ask a different way, Tony and Dale, you know, I see that your resource grade right now is 100 gram per ton. Could you remind us, is a lot of that resource from, Southeast Deeps?

Tony Scott (VP Exploration and Technical Services)

Yes, a lot of the,

Cosmos Chiu (Executive Director)

Okay

Tony Scott (VP Exploration and Technical Services)

that

Cosmos Chiu (Executive Director)

So that's what you're trying to convert?

Dale Andres (CEO)

Yeah, and Tony, you can expand on this, but I'd say we're trying to convert, I think it's just over 4 million tons, if I recall correctly. Tony can correct me of inferred resource in the Southeast Deeps. And we're trying to convert the highest grade portions of that, obviously. But as Tony mentioned, the silver grades are expected to be lower than reserve grades, based on, you know, based on the results that we have. But base metals are holding up very, very nicely, and the copper is a key differentiator for that zone as well.

Cosmos Chiu (Executive Director)

Mm-hmm. And Dale and Tony, when you know, we've talked about this in the past, when you talked about the updated life of mine plans last year and this year as well, there was always a dual track in terms of targeting both, you know, number one, the replacement of mine life, and also number two, sort of to maintain hopefully, reserve grade. Is that still kinda like the target, you know, in the background in terms of what you're trying to do with each and every one of these life of mine plans?

Dale Andres (CEO)

Yeah, I'd say we're trying to do this time around maybe three things. One, and I mentioned it in the script, was to increase throughput, continue to increase throughput rates, and we are driving towards that 3,500 tons per day. We'll have to see as we go through the mine planning work whether we can sustain that and how we incorporate those higher throughput rates into our new life of mine plan. But that that's clearly a target for us. We do plan to extend the mine life.

Just as we do higher throughput rates, we are taking and able to continue to lower, you know, able to take lower grades, and we're continuing to lower our unit cost, and that's just operating efficiencies, operating, you know, well above 3,000 tons per day. Just as a reminder, our previous life of mine averaged 2,950 tons per day, and we do plan to extend the mine life, including those higher throughput rates. And then, as I said, we'll make a decision on the copper circuit, and that's again a margin enhancement that we're looking to bake into the new life of mine plan as well. But we're just currently going through all of that work.

Cosmos Chiu (Executive Director)

Great. Thank you. And maybe as a follow-up and broader scale as well, you know, Dale, as you mentioned, you know, great looking balance sheet these days. You know, we're getting cash sweep from the joint venture and $85 million in cash, no debt, and you're only spending about $18 million in exploration. So what's next? As you continue to grow the company, is everything really organic, internal, or are you looking externally as well? Can you maybe talk about the growth plans with, you know, the new exploration team now in place, new VP exploration, are you increasing, potentially increasing exploration exploration budget? So again, internal, external, how are you gonna continue to grow the company? And, you know, can we see exploration budget increase?

Dale Andres (CEO)

Yeah. Thanks for highlighting that, Cosmos, including the cash, the cash balance. You know, we're sitting on over $85 million, as you pointed out, and if you take our share of the joint venture cash, which was $20 million at the end of April, you know, the combination of that is over $100 million. Just to be clear, that $85 million and all the distributions made from the joint venture is after our exploration expenditures, and we do have plans for $18 million this year and that is a ramp up from what we did last year.

There is only so much we can do from an exploration perspective to execute that, and maybe, Tony, you can comment or provide some additional color. Right now, we're working towards that $18 million budget, about half of that on resource conversion and extension, and half more on what I would call pure greenfields exploration, even though some of that is near mine. If we tag into something really interesting, trust me, Cosmos, we will put the dollars and those to work on that.

But, but it's important to make sure that we're, you know, properly, we have a plethora of targets, and we need to make sure that we're properly prioritizing those, doing the work to, you know, make sure we're attacking the best areas first. And there's still lots of work to do. We've done a lot of foundational work over the last 18-24 months. We're in a position to start drilling, and we are drilling. But, yeah, just we do need to be a bit careful about just ramping up. It's such a big property, we're gonna be here for many years. Tony, I don't know if you want to expand on that.

Tony Scott (VP Exploration and Technical Services)

I think you captured it there pretty well, Dale. I mean, realistically, look, we wanna make sure that we're doing good exploration and that we're sort of modifying the program on the results that we get. We don't wanna just go out and drill a massive program and not be following it properly. So, we are gonna do it sensibly and do it within the sort of capacity that we have, like, to actually make sure that we're doing the right work. So I think, I mean, we are ramping it up, but I think that this is a level where we can make sure that we're doing good, sensible exploration.

Dale Andres (CEO)

And then maybe just to pick up on the other part of your question, Cosmos-

Cosmos Chiu (Executive Director)

Mm-hmm.

Dale Andres (CEO)

We will look at, you know, opportunistically at the other opportunities. We're not gonna comment about anything specifically, but we are looking to grow the company. We don't need to do anything beyond our current district, but we will look at things opportunistically, as well. We have a great balance sheet, as you pointed out.

Cosmos Chiu (Executive Director)

Great. Thanks, Dale, Tony, and Andre. Those are all the questions I have. Thank you.

Operator (participant)

Again, if you would like to ask a question, press Star, then the number 1 on your telephone keypad. There are no further questions at this time. Mr. Andres, I turn the call back over to you.

Dale Andres (CEO)

Well, thank you, operator, and thanks to everyone participating in the call. We look forward to updating you as the year progresses. Thanks again.

Operator (participant)

This concludes today's conference call. You may now disconnect.