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Gatos Silver, Inc. (GATO)·Q4 2023 Earnings Summary

Executive Summary

  • Q4 2023 delivered strong unit-cost execution at CLG (LGJV): by-product AISC fell to $11.12/oz (vs $12.13 YoY) and co-product AISC was $14.73/AgEq oz (vs $14.80 YoY), despite lower realized silver sales; LGJV revenue was $73.5M (vs $93.0M YoY) and EBITDA $38.6M (vs $61.9M YoY) .
  • Parent-level profitability inflected: Gatos Silver net income was $12.3M with $0.18 EPS (vs $4.7M, $0.07 YoY) on lower G&A and legal settlements; Free Cash Flow was $22.0M (vs $5.8M YoY) aided by capital distributions from the JV .
  • 2024 guidance introduced: silver 8.4–9.2Moz; by-product AISC $9.50–$11.50/oz; co-product AISC $14.00–$16.00/AgEq oz; throughput to average 3,000–3,300 tpd with mine debottlenecking; sustaining capex ~$45M and exploration/definition ~$18M (100% basis) .
  • Operational upside catalyst: December tests showed the plant can operate closer to 3,500 tpd with minor upgrades (<$0.5M), positioning for higher sustainable rates as mine constraints ease; management targets sustaining 3,500 tpd beyond 2024 and is evaluating 4,000 tpd expansion options .
  • Estimate benchmark: S&P Global consensus for Q4 2023 revenue/EPS was unavailable for GATO; we cannot determine beat/miss vs Street for the quarter (SPGI mapping missing).

What Went Well and What Went Wrong

What Went Well

  • Cost control and AISC: By-product AISC improved to $11.12/oz (–8% YoY) and co-product AISC to $14.73/AgEq oz (–0.5% YoY) as sustaining capex normalized and operating efficiencies offset inflation and MXN strength .
  • Parent profitability inflection: Q4 EPS rose to $0.18 on reduced G&A and lower legal settlement costs; EBITDA more than doubled to $11.8M; year-end cash reached $55.5M with no debt .
  • Throughput momentum and capacity upside: Average Q4 tpd exceeded 3,000, and December tests demonstrated ~3,500 tpd potential with good metallurgy and minimal capex, supporting 2024 throughput ramp and medium-term 3,500 tpd goal .

What Went Wrong

  • Revenue/EBITDA headwinds at JV: LGJV revenue fell 21% YoY to $73.5M, with EBITDA down 38% to $38.6M, primarily due to lower silver sales volumes and a smaller positive provisional pricing adjustment vs Q4’22; cost of sales rose 10% on higher throughput and FX .
  • Macro/FX pressure: Strengthening Mexican peso increased USD-reported operating costs; management cited FX and inflationary pressures partially offset by productivity programs .
  • Lower grades YoY: As planned, 2023 grades trailed 2022, weighing on YoY metal output despite record throughput; Q4 silver production was 2.56Moz vs 2.92Moz in Q4’22 .

Financial Results

Core P&L and Cost Metrics

MetricQ4 2022Q3 2023Q4 2023
LGJV Revenue ($M, 100% basis)$93.0 $67.0 $73.5
LGJV EBITDA ($M)$61.9 $31.2 $38.6
By-product AISC ($/oz Ag payable)$12.13 $14.71 $11.12
Co-product AISC ($/oz AgEq payable)$14.80 $17.64 $14.73
Gatos Silver Net Income ($M)$4.7 $3.3 $12.3
Gatos Silver Diluted EPS ($)$0.07 $0.05 $0.18
LGJV Cash from Ops ($M)$39.1 $29.4 $38.2

Notes: Lower JV revenue YoY stems from reduced silver sales volumes and a larger positive provisional revenue adjustment in Q4’22; cost of sales increased with throughput and MXN strength . Parent EPS strength reflected lower G&A and legal settlements .

Production and Operating KPIs (CLG – 100% basis)

KPIQ4 2022Q3 2023Q4 2023
Tonnes milled (dmt)261,929 268,312 277,318
Tonnes per day (dmt)2,847 2,916 3,014
Silver grade (g/t)387 285 318
Silver production (Moz)2.92 2.22 2.56
Zinc in conc. (M lbs)13.5 13.8 14.6
Lead in conc. (M lbs)9.7 9.5 10.2
Gold in lead conc. (k oz)1.36 1.28 1.39
Silver Eq production (Moz)4.16 3.46 3.88

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Silver productionFY20237.4–8.2Moz8.8–9.3MozRaised (Nov 6, 2023)
Silver Eq productionFY202312.4–13.8Moz13.8–14.6MozRaised (Nov 6, 2023)
By-product AISCFY2023$11.00–$13.00/ozLower half of range expectedMaintained bias lower
Co-product AISCFY2023$15.50–$17.50/AgEq ozLower half of range expectedMaintained bias lower
Sustaining capex (CLG)FY2023~$45M~$45MMaintained
Silver productionFY2024N/A8.4–9.2MozIntroduced
Silver Eq productionFY2024N/A13.5–15.0MozIntroduced
By-product AISCFY2024N/A$9.50–$11.50/ozIntroduced
Co-product AISCFY2024N/A$14.00–$16.00/AgEq ozIntroduced
ThroughputFY2024N/A3,000–3,300 tpdIntroduced
Sustaining capex (CLG)FY2024N/A~ $45MIntroduced
Exploration + definitionFY2024N/A~ $18M (cap $9M; exp $9M)Introduced

Earnings Call Themes & Trends

TopicPrevious Mentions (Q2 2023, Q3 2023)Current Period (Q4 2023)Trend
Throughput debottleneckingRecord ~2,900 tpd; debottlenecking in mine; confident on stable throughput/recoveries into 2024 >3,000 tpd in Q4; December tests show ~3,500 tpd capacity with good metallurgy; planning minor upgrades H1’24 Improving capacity; moving toward 3,500 tpd
Cost control vs FXExpect AISC within guidance ($11–$13 by-product); continuous improvement offsetting MXN/inflation YoY by-product AISC down to $11.12; co-product $14.73; productivity and cost initiatives cited Offsetting FX/inflation; AISC favorable
Grade/production mixGuided to lower grades H2’23 vs 2022; raised 2023 silver/AgEq guidance in Nov Q4 silver 2.56Moz (–12% YoY) but higher base metals; throughput gains cushioned volumes Grades remain below 2022; throughput mitigates
Cash and distributionsJV cash generation; capital distributions ($50M in Jul; $35M to Gatos); debt-free Q4 JV FCF $22.3M; $30M JV distribution paid Feb 15, 2024 ($21M to Gatos); parent cash $55.5M YE Strong, recurring distributions
Mine life extension (SE Deeps)Infill drilling to 50m spacing; reserve/resource update in 2H’24 targeted to add 3–4 years On track to update LOM and extend mine life by ~3 years in Q3’24; 12 rigs active Advancing to resource conversion

Management Commentary

  • “All-in sustaining cost (‘AISC’) per silver ounce was at the lower end of 2023 guidance thanks to improved operating efficiencies, which helped to offset inflationary cost pressures and the impact of the stronger Mexican peso.” – CEO, press release .
  • “We demonstrated in December that the current capacity of the mill is closer to 3,500 tonnes per day and we are planning some minor upgrades to make sure it can sustain those kind of rates.” – CEO, call .
  • “Revenues…were 4% lower…due to lower silver sales volumes…In Q4 2022, we recorded a larger positive provisional revenue adjustment…Cost of sales…10% higher…[and] the strengthening of the Mexican peso…was partly offset by productivity improvements.” – CFO, call .
  • “An income tax recovery of $1.7 million was recorded in Q4 2023 compared to income tax expense of $14.8 million in Q4 2022.” – CFO, call .
  • “Corporate G&A was approximately $2 million lower in Q4 2023…lower audit, consulting and severance costs…” – CFO, call .

Q&A Highlights

  • Theme: Incorporating higher throughput into mine plan. Q: Can 3,500 tpd be included in the new mine plan? A: Management is progressing toward 3,500 tpd; 2024 guidance (3,000–3,300 tpd) reflects momentum toward that goal .
  • Tone: Confident on operational execution, cash generation, and mine-life extension with a Q3’24 update targeted .

Estimates Context

  • S&P Global consensus estimates for Gatos Silver (GATO) Q4 2023 revenue and EPS were unavailable due to a missing CIQ mapping; as a result, we cannot assess beat/miss versus Street for the quarter. Values would normally be retrieved from S&P Global, but were not available in this case.

Key Takeaways for Investors

  • Cost execution is a standout: by-product AISC fell to $11.12/oz despite FX and inflation, implying resilient margins into 2024 if silver prices hold .
  • Throughput is the key 2024 catalyst: demonstrated ~3,500 tpd capacity with low capex; debottlenecking the mine is the gating factor to lift sustainable rates and volumes .
  • Cash returns are durable: JV FCF of $22.3M in Q4 and subsequent $30M distribution (Gatos share $21M) support a debt-free parent balance sheet with $55.5M YE cash .
  • Near-term mine-life uplift: SE Deeps conversion drilling targets an additional ~3 years in the Q3’24 reserve/resource update, supporting medium-term throughput expansion options .
  • Watch FX and grades: MXN strength and grade variability remain headwinds; productivity gains and capex discipline will need to continue offsetting them .
  • 2024 guidance frames expectations: 8.4–9.2Moz silver at $9.50–$11.50/oz by-product AISC and 3,000–3,300 tpd throughput; delivery vs the low end of AISC will be a stock driver .

Supporting Details and Additional Data

  • Parent-level drivers: Higher Q4 NI/EPS primarily due to lower G&A and legal settlements; change in operating cash flow classification reflects shift from JV dividends (2022) to capital distributions (2023) booked in investing .
  • December throughput test specifics: 27.3 operating days; average 3,573 tpd on operating days, peak 4,096 tpd; month average 3,145 tpd including downtime; minor electrical/programming mods in test; < $0.5M additional mods planned in H1’24 .

Non-GAAP

  • AISC, EBITDA, and Free Cash Flow are non-GAAP measures; reconciliations and definitions are provided in the press release and 8-K exhibits .