GATO Gatos Silver, Inc. - 10-K/A

Item 1A. Risk Factors

This Amendment No. 1 should be read in conjunction with the Original Filing and the Company’s other filings with the SEC. The Original Filing includes the Risk Factors that were not impacted by the change as described in Amendment No. 1. The following risk could materially and adversely affect our business, financial condition, cash flows, and results of operations, and the trading price of our common stock could decline. Refer also to the other information set forth in this Report, including our consolidated financial statements and the related notes and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Risks Related to Our Business and Industry

We have identified material weaknesses in our internal control over financial reporting. If we fail to remediate these deficiencies (or fail to identify and/or remediate other possible material weaknesses), we may be unable to accurately report our results of operations, meet our reporting obligations or prevent fraud, which may adversely affect investor confidence in us and, as a result, the value of our common stock .

Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles. Effective internal control over financial reporting is necessary for us to provide reliable financial reports and, together with disclosure protocols and procedures, is designed to prevent fraud.

We are required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal controls over financial reporting for fiscal year 2023. This assessment includes disclosure of any material weaknesses identified by our management in our internal controls over financial reporting. Additionally, we are required to disclose changes made in our internal controls and procedures on a quarterly basis.

However, for as long as we are an emerging growth company, or a smaller reporting company that is a non-accelerated filer, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404(b). At such time this attestation will be required, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating.

We previously identified material weaknesses in our internal controls over financial reporting. Except as identified below regarding the failure to design and maintain effective controls over accounting for current and deferred taxes and the failure to design and maintain effective controls to ensure the accurate classification of distributions from our investment in affiliates in the Consolidated Statements of Cash Flows, we have remediated these historical material weaknesses.

In connection with our review of the internal control related to the preparation of the financial statements for the fiscal year ended December 31, 2023, we identified that additional remedial actions are required to design and to maintain effective controls over accounting for current and deferred taxes in order to consider this material weakness remediated. As part of our remedial efforts during 2023 we engaged a third-party with expertise in each jurisdiction we operate and in relevant U.S. GAAP tax accounting to assist us in accounting for current and deferred taxes; we hired an experienced tax manager at the end of the third quarter to prepare current and deferred tax provisions; and hired a third-party internal controls expert to advise on the design and implementation of tax related internal controls. During 2024 we intend to enhance our processes and controls implemented during 2023, including enhancing our review procedures, to ensure our procedures are designed to accurately account for and disclose current and deferred tax.

In connection with our review of the internal control structure related to the preparation of the restated financial statements for the fiscal year ended December 31, 2023, we have identified the following material weakness in our internal controls over financial reporting relating to the failure to design and maintain effective controls to ensure the accurate classification of distributions from our investment in affiliates in the Consolidated Statements of Cash Flows. We are engaging external support with extensive U.S. GAAP knowledge to advise on external financial reporting matters, and are strengthening our review procedures over the preparation of the Consolidated Statement of Cash Flows.

We have incurred significant costs to date in connection with efforts to remediate these material weaknesses, and we expect to incur additional costs in the future. Even if we successfully remediate the remaining material weakness described above, we cannot provide any assurance that we will not suffer from these or other material weaknesses in the future.

Our procedures and controls and our ongoing remediation efforts may not enable us to avoid further material weaknesses in the future. We may need to undertake various actions, such as implementing new internal controls and procedures and hiring additional

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accounting staff or external consultants. If we are unable to assert that our internal controls over financial reporting are effective, or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal controls to the extent required, we may be unable to accurately report our financial condition and results of operations in a timely matter and could lose investor confidence in the accuracy and completeness of our financial reports, which could cause the price of our common stock to decline.

PART II

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in “Item 8. Financial Statements and Supplementary Data” and the other information included elsewhere in this Report.

Restatement of previously issued Consolidated Financial Statements for the correction of the classification of capital distributions received from the LGJV on the Statements of Cash Flows

During the preparation of the financial statements for the three months ended March 31, 2024, the Company identified that the capital distributions received from its investment in affiliates classified as cash provided by investing activities on the Consolidated Statements of Cash Flows should have been classified as cash flow provided by operating activities. Based on management's judgement, the Company considered the declaration of the capital distribution (in its legal form) to be the nature of the activity that generated the cash flow and, therefore, classified capital distributions as cash provided by investing activities on the Consolidated Statements of Cash Flows. On further analysis, it was determined that management should have considered the underlying source of the cash flow at the LGJV that generated the funds for the capital distributions when determining its classification on the Company's Statement of Cash Flows. The capital distributions received previously classified as cash flow provided by investing activities should have been classified as cash flows provided by operating activities.

The impact of the correction of the error on the financial statements of the Company is an increase in cash provided by operating activities of $59.5 million and a decrease in cash provided by investing activities of $59.5 million. There is no impact on the net increase in cash and cash equivalents or the balance of cash and cash equivalents at December 31, 2023. The Consolidated Balance Sheets and balance of cash and cash equivalents as of December 31, 2023, and the Consolidated Statements of Income and Comprehensive Income and the Consolidated Statements of Shareholders’ Equity for the year ended December 31, 2023, are not affected by this change. The Combined Financial Statements of the LGJV are also not impacted by this change.

As discussed in the Explanatory Note to this Form 10-K/A and in Note 3 to the consolidated financial statements included in this Annual Report on Form 10-K/A, we have restated the previously issued Consolidated Statement of Cash Flows for the year ended December 31, 2023. The following discussion and analysis of our financial condition and results of operations incorporates the restated Consolidated Statements of Cash Flow amounts.

Overview

We are a Canadian-headquartered, Delaware-incorporated precious metals exploration, development and production company with the objective of becoming a leading silver producer. Our primary efforts are focused on the operation of the LGJV in Chihuahua, Mexico. The LGJV was formed on January 1, 2015, when we entered into the Unanimous Omnibus Partner Agreement with Dowa to further explore, and potentially develop and operate mining properties within the LGD. The LGJV Entities own certain surface and mineral rights associated with the LGD. The LGJV ownership is currently 70% Gatos Silver and 30% Dowa. On September 1, 2019, the LGJV commenced commercial production at CLG, which produces a silver containing lead concentrate and zinc concentrate. We are currently focused on the production and continued development of the CLG and the further exploration and development of the LGD.

2023 Key Highlights

Gatos Silver Inc.

• Reported net income of $12.9 million or $0.19 per basic and $0.18 per diluted share;

• Reported Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") 1 of $12.4 million;

• Received capital distributions of $59.5 million from the LGJV;

1 See "Non-GAAP Financial Measures" below.

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• No debt and $50 million available for withdrawal on the Credit Facility after $9.0 million debt repayment made as of July 21, 2023; and

• Operating cash flow of $47.5 million and free cash flow of $47.5 million.

LGJV (100% basis)

Operational

• Achieved record processing throughput of 1,071,400 tonnes, averaging 2,935 tpd for 2023 over 10% higher than in 2022 and over 3,014 tpd in the fourth quarter of 2023;

• Recoveries achieved or exceeded design rates for payable metals with silver, zinc and lead recovery averaging 89.4%, 62.1%, and 88.7%; respectively;

• CLG mine life extended by 2.75 years to the end of 2030 with a 46% increase in expected total silver production per the Los Gatos Technical Report; and

• Completed further drilling in a large zone of mineralization known as South-East Deeps that extends 415m below the reported reserve which resulted in a significant increase in the 2023 mineral reserve and mineral resource reflected in the Los Gatos Technical Report.

Financial

• The LGJV reported revenue, net income and EBITDA 1 of $268.7 million, $53.4 million and $135.8 million, respectively;

• Generated cash flow from operations of $142.0 million in 2023, and free cash flow 1 of $84.9 million;

• Made $85.0 million in capital distributions to partners of the LGJV;

• Cost of sales totaled $111.3 million and co-product cash cost per ounce of payable silver equivalent 1 was $12.11 and by-product cash cost per ounce of payable silver 1 was $6.31 in 2023; and

• Co-product AISC per ounce of payable silver equivalent 1 was $15.51 and by-product AISC per ounce of payable silver 1 was $11.33 in 2023.

Results of Operations

Results of operations Gatos Silver

The following table presents certain information relating to our operating results for the years ended December 31, 2023 and 2022. In accordance with generally accepted accounting principles in the United States (“U.S. GAAP”), these financial results represent the consolidated results of operations of our Company and its subsidiaries (in thousands).

Year Ended December 31,

(in thousands)

Expenses

Exploration

General and administrative

Amortization

Total expenses

Other income

Equity income in affiliates

Legal settlement loss

Interest expense

Interest income

Other income

Total net other income

Income before taxes

Income tax expense

Net income

Year Ended December 31, 2023, Compared to Year Ended December 31, 2022

For the year ended December 31, 2023, we reported net income of $12.9 million compared to net income of $14.5 million for 2022. The following factors contributed to the difference:

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Exploration

During 2023 we had no exploration activity on the Company-owned Santa Valeria property since all exploration efforts were focused on the CLG, and as a result the 2023 exploration costs decreased by approximately $0.1 million, compared to 2022.

General and administrative expenses

During 2023, we incurred general and administration expense of $25.7 million compared to $25.5 million in 2022. In 2023, general and administrative expenses include non-cash stock-based compensation of $6.0 million, non-recurring professional fees related to legal defense fees of $3.2 million, costs related to the restatement of 2021 and 2022 quarterly financial statements of $2.3 million, and severances of $0.2 million. In 2022, general and administrative expenses include non-recurring professional fees related to legal defense of $6.2 million, non-cash stock-based compensation of $2.8 million, costs related to the restatement of 2021 financial statements of $1.3 million, and severances of $1.0 million. The Company also incurs expenses related to providing management and administration services to the LGJV, for which it receives a management fee, included in Other Income ($6.0 million and $5.0 million in 2023 and 2022, respectively).

Equity income in affiliates

The lower equity income in affiliates in 2023 is as a result of the lower net income recorded at the LGJV. See “Results of Operations LGJV.”

Legal settlement loss

We signed a term sheet to settle the Canadian Class Action for a payment of $3.0 million ($1.5 million net of expected insurance proceeds). The $7.9 million settlement loss (net of expected insurance proceeds) recorded in 2022 is related to a settlement agreement reached with the US Class Action lawsuit. These lawsuits are partially covered by our directors and officers insurance. See Note 10. Commitments, Contingencies and Guarantees.

Interest expense

The $0.2 million increase in interest expense was mainly due to the recognition of the outstanding balance of deferred financing costs upon the repayment of the remaining balance of $9.0 million on the Credit Facility.

Interest income

The $1.2 million increase in interest income was due to the increase in cash balance during the year and an increase in the interest rate earned on cash deposits.

Other income

Other income increased primarily due to an increase in the LGJV management fee from $5.0 million in 2022 to $6.0 million in 2023.

Income tax expense

Income tax expense of $0.1 million relates to operations of the Company's Canadian subsidiary. Tax expense of $1.6 million in 2022 reflected withholding tax on dividends received from the LGJV.

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Results of operations LGJV

The following table presents operational information and select financial information of the LGJV for the years ended December 31, 2023 and 2022. The financial information is extracted from the Combined Statements of Income. The financial and operational information of the LGJV and CLG is shown on a 100% basis. As of December 31, 2023 and 2022, our ownership of the LGJV was 70%.

Year Ended December 31,

(in thousands, except where otherwise stated)

Revenue

Cost of sales

Royalties

Exploration

General and administrative

Depreciation, depletion and amortization

Total other (income)

Income tax expense

Net income

Sustaining capital 1

Resource development drilling expenditures 1

Operating Results

Tonnes milled (dmt)

Tonnes milled per day (dmt)

Average Grades

Silver grade (g/t)

Gold grade (g/t)

Lead grade (%)

Zinc grade (%)

Contained Metal Produced

Silver ounces (millions)

Zinc pounds - in zinc conc. (millions)

Lead pounds - in lead conc. (millions)

Gold ounces - in lead conc. (thousands)

Recoveries 2

Silver - in both lead and zinc concentrates

Zinc - in zinc concentrate

Lead - in lead concentrate

Gold - in lead concentrate

Co-product cash cost per ounce of payable silver equivalent 1

By-product cash cost per ounce of payable silver 1

Co-product AISC per ounce of payable silver equivalent 1

By-product AISC per ounce of payable silver 1

1. See “Non-GAAP Financial Measures” below.

2. Recoveries are reported for payable metals in the identified concentrate. Recoveries reported previously were based on total metal in both concentrates.

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LGJV

Year Ended December 31, 2023, Compared to Year Ended December 31, 2022

For the year ended December 31, 2023, the LGJV reported net income of $53.4 million compared to net income of $72.2 million for the year ended December 31, 2022. The change in net income was primarily due to the following factors:

Revenue

The table below provides a breakdown of the LGJV’s concentrate sales including volumes of payable metal and realized sales prices for the year ended December 31, 2023 and 2022:

Year Ended

December 31,

Sales volumes by payable metal

Silver

million oz

Zinc

million lb

Lead

million lb

Gold

Average realized price by payable metal

Silver

Zinc

Lead

Gold

Revenue by payable metal

Silver

Zinc

Lead

Gold

Subtotal

Treatment and refining charges

Subtotal

Provisional revenue adjustment

Total revenue

Silver sales represented 68% and 61% of our revenues before treatment and refining charges and the provisional revenue adjustments in 2023 and 2022, respectively. Revenues decreased by 14% in 2023 compared to 2022, as a result of lower sales volumes of silver, zinc and lead, partly offset by increased sales volumes of gold. The decrease in sales volumes was primarily due to a decrease in silver, zinc, lead and gold ore grades of 19%, 11%, 20% and 12%, respectively. The overall decrease in sales volumes was offset by an increase in realized prices of silver, lead and gold of 17%, 8%, and 8%, respectively, partly offset by a decrease in the realized zinc price of 30%. Treatment and refining charges decreased by 21% and the 2023 provisional revenue adjustments resulted in a total revenue decrease of 11.3 million in 2023 compared to an increase of 11.3 million in 2022. Provisional revenue adjustments account for commodity price fluctuations in concentrate sales still subject to final settlement.

Cost of sales

Cost of sales increased by 4% in 2023 compared to 2022, primarily as a result of a 10% increase in mining and milling rates, which included an increase in equipment maintenance costs of $2.5 million and operation of the leaching plant commissioned in 2023 of $1.1 million.

Cash costs 1 was $147.9 million in 2023, 1% higher than the $146.3 million incurred in 2022. In 2023 b y-product credits 1 of $95.6 million were 24% less than the $125.8 million credit in 2022, mainly due to lower realized zinc prices and lower zinc and lead sales in 2023. As a result co-product cash cost 1 per ounce of payable silver equivalent and by-product cash cost 1 per ounce of payable silver increased by 29% and 191% respectively, to $12.11 and $6.31, respectively, for the year ended 2023. All-in sustaining costs 1 were

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$189.4 million in 2023 15% lower than the $222.8 million incurred in 2022. Co-product all-in sustaining cost 1 per of payable silver equivalent ounce was $15.51 in 2023 compared to $14.33 in 2022. By-product all-in sustaining cost 1 per payable silver ounce was $11.33 in 2023 compared to $10.24 in 2022.

Royalties

Royalty expense decreased by $1.7 million in 2023 compared to 2022 due to the decrease in the royalty rate upon achieving a payment threshold per the royalty agreement.

Exploration

Exploration expenditure decreased by $6.9 million in 2023 primarily due to reduced greenfield exploration, as the focus during 2023 was on the ongoing resource expansion drilling of the South-East Deeps Zone which was capitalized.

General and administrative

General and administrative expenses for 2023 were $3.8 million (26%) higher than in 2022. The increase was primarily due to a $0.9 million increase in audit and consulting fees, $1.0 million increase in management fees payable to Gatos Silver, $0.8 million increase in salaries, $0.5 million increase in insurance expense and $0.4 million increase in concessions costs associated with changes in government regulations.

Depreciation, depletion and amortization

Depreciation, depletion, and amortization expense increased by approximately 8% year over year primarily as a result of commissioning of the third lift of the tailing storage facility in December 2022, the paste fill plant in March 2023 and the fluorine leaching plant in July 2023. The increase was partly offset by the reduction in depreciation, depletion and amortization as a result of the increase in mineral reserves and the extension of the life of mine effective July 2023.

Other expense (income)

Other income of $1.6 million for the year ended December 31, 2023 consists of $1.6 million of interest income earned on average monthly cash balances and $2.6 million of gain on foreign exchange, offset by $0.7 million of other expense associated with inventory write offs due to obsolescence, $1.1 million of accretion expense and $0.7 million of interest expense on advances from a customer. Other income of $1.4 million for the year ended December 31, 2022, consists of an $0.8 million of gain on disposition of assets and a gain of $2.3 million on foreign exchange, offset by $1.1 million of accretion expense and $0.6 million of interest expense on advances from a customer.

Income tax expense

In 2023, the LGJV had income tax expense of $8.1 million compared to $37.3 million in 2022. Income tax expense decreased mainly due to a decrease in net income before tax and a decrease in the valuation allowance on deferred taxes due to the extension of the expected mine life.

Sustaining capital

During 2023, the sustaining capital expenditures primarily consisted of $21.1 million of mine development, $3.0 million on the construction of dewatering wells, $4.2 million on the construction of the fluorine leaching plant facility, $8.8 million for the purchase of mining equipment and $1.9 million on underground power distribution infrastructure. During 2022, major sustaining capital expenditures included $27.1 million of mine development, $19.5 million on the construction of the paste-fill plant, $8.2 million on the construction of the raise of the tailings storage facility, $2.6 million for the construction of a ventilation raise, $3.5 million for the purchase of mining equipment, $2.9 million on underground power distribution infrastructure.

Resource development drilling expenditures

During 2023, resource development drilling expenditures primarily related to resource expansion drilling of the South-East

Deeps zone at CLG. During 2022, there were no resource development drilling expenditures incurred.

1 See “Non-GAAP Financial Measures” below.

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Cash Flows

Gatos Silver

The following table presents summarized information of our cash flows for the years ended December 31, 2023 and 2022.

Year Ended December 31,

(in thousands)

Net cash provided (used) by

Operating activities

Investing activities

Financing activities

Total change in cash

Cash flow provided by operating activities was $47.5 million in 2023, compared to cash provided by operating activities of $14.6 million in 2022. The $32.9 million increase in operating cash flow was primarily due to $59.5 million of capital distributions from the LGJV, compared to $30.8 million in dividends received from the LGJV in 2022.

There was no cash flow from investing activities in 2023, compared to $0.1 million in 2022.

Free cash flow (See "Non-GAAP Financial Measures") totaled $47.5 million in 2023 compared to $14.5 million in 2022. The increase is due to the increase in cash distributions received from the LGJV in 2023.

Cash used by financing activities was $9.0 million in 2023, compared to $4.1 million in 2022. Cash used by financing activities in 2023 consisted of the $9.0 million full repayment of the outstanding Credit Facility balance. Cash used by financing activities in 2022, reflected the $4.0 million partial repayment of the Credit Facility.

LGJV

The following table presents summarized information relating to the LGJV’s cash flows for years ended December 31, 2023 and 2022.

Year Ended December 31,

(in thousands)

Net cash provided (used) by

Operating activities

Investing activities

Financing activities

Total change in cash

Cash provided by operating activities was $142.0 million and $157.4 million for the years ended December 31, 2023 and 2022, respectively. The $15.4 million decrease in cash provided by operating activities was primarily due to the decrease in revenue partially offset by cash flow from working capital changes.

Cash used by investing activities was $57.1 million and $82.3 million for the years ended December 31, 2023, and 2022, respectively. The $25.2 million decrease in cash used was primarily due to lower capital expenditures incurred during 2023.

Free cash flow (See "Non-GAAP Financial Measures") at the LGJV totaled $84.9 million in 2023 compared to $75.1 million in 2022, reflecting lower sustaining capital expenditures partly offset by lower revenues.

Cash used by financing activities was $85.5 million and $60.4 million for the years ended December 31, 2023 and 2022, respectively. During 2023, the LGJV distributed $85.0 million to the joint venture partners and made $0.5 million in equipment loan payments. During 2022, the LGJV paid dividends of $55.0 million to the joint venture partners and made $5.4 million in equipment loan payments.

Liquidity and Capital Resources

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As of December 31, 2023 and 2022, the Company had cash and cash equivalents of $55.5 million and $17.0 million, respectively. The increase in cash and cash equivalents was primarily due to receipt of $59.5 million in capital contributions and the $6.0 million management fee from the LGJV, partly offset by general and administrative costs incurred in the year.

Sources and Uses of Capital Resources

As at April 30, 2024, our cash and cash equival ents are $85.4 million and we have $50.0 million available to be drawn under the Credit Facility. The LGJV had cash and cash equivalents of $20.0 million as at April 30, 2024. On February 15 and April 22, 2024, the LGJV made a $30.0 million and a $25.0 million capital distribution to the LGJV partners, respectively, of which the Company’s share was $21.0 million and $17.5 million, respectively. We believe we have sufficient cash and access to borrowings and other resources to carry out our business plans for at least the next 12 months. We may decide to increase our current financial resources with external financings if our long-term business needs require us to do so however there can be no assurance that financing will be available to us on acceptable terms, or at all. We manage liquidity risk through our cash balances, credit facility, and the management of our capital structure.

We may be required to provide funds to the LGJV to support operations at the CLG which, depending upon the circumstances, may be in the form of equity, various forms of debt, joint venture funding or some combination thereof. There can be no assurance that additional funds will be available to us on acceptable terms, or at all. If we raise additional funds by issuing equity or convertible debt securities, substantial dilution to existing stockholders may result. Additionally, if we raise additional funds by incurring new debt obligations, the terms of the debt may require significant cash payment obligations, as well as covenants and specific financial ratios that may restrict our ability to operate our business.

Finally, as part of our ongoing business strategy we regularly evaluate our capital structure. We may from time to time use our existing cash to fund opportunities or return capital to shareholders.

Indebtedness and Lines of Credit

On December 13, 2023, we entered into a second amended and restated Credit Facility with BMO, maintaining a credit limit of $50.0 million, with an accordion feature providing up to an additional $50.0 million, subject to certain conditions. Borrowings under the Credit Facility:

• mature on December 31, 2026, and

• bear interest at a rate equal to either a term SOFR rate plus a margin ranging from 2.75% to 3.75% or a U.S. base rate plus a margin ranging from 1.75% to 2.75%, at our option.

The Credit Facility contains affirmative and negative covenants that are customary for agreements of this nature. The affirmative covenants require the Company to comply, at all times, with, among other things, a Leverage Ratio not greater than 3.00 to 1.00, with earnings before interest, tax, depletion depreciation and amortization calculated upon a trailing four fiscal quarter period, a liquidity covenant not less than $20.0 million and an interest coverage ratio not less than 4.00 to 1.00 calculated based on a trailing four fiscal quarter period. The negative covenants include, among other things, limitations on certain specified asset sales, mergers, acquisitions, indebtedness, liens, dividends and distributions, investments and transactions with affiliates. As of December 31, 2023, we had $nil of borrowings outstanding under the Credit Facility.

Contractual Obligations

We and the LGJV entered into commitments with federal and state agencies to lease surface and mineral rights in Mexico related to our exploration activities. These leases are renewable annually.

The LGJV has a renewable energy supply contract with a committed purchase amount of 140,000MW per annum until September 6, 2025. As at December 31, 2023, the expected purchase commitment was $11,400 in 2024 and $9,500 in 2025, for an aggregate of $20,900. Part of the cost depends on the regulated rates by the Mexico Power Market. The LGJV consumed 159,964 MW and 146,750 MW under this contract in the years ended December 31, 2023 and 2022, respectively.

Critical Accounting Policies

Listed below are the accounting policies that we believe are critical to our financial statements due to the degree of uncertainty regarding the estimates or assumptions involved and the magnitude of the asset, liability or expense that is being reported. For a discussion of recent accounting pronouncements, see Note 2, Summary of Significant Accounting Policies in the notes to the consolidated financial statements.

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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. The value of equity method investments is adjusted if it is determined that there is an other-than-temporary decline in value. The Company reviews equity method investments for an other-than-temporary decline in value when events or circumstances indicate that a decline in the fair value of the investment below its carrying value is other-than-temporary. Our investment in the LGJV is presented as investment in affiliates in the consolidated balance sheet. The difference between the carrying amount of the investment in affiliates and our equity in the LGJV’s net assets is due to value of mineral resources at MPR. 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 income.

Mineral Properties and Carrying Value of Long-Lived Assets (LGJV)

Mineral property acquisition costs are recorded at cost and are deferred until the viability of the property is determined. Exploration, mineral property evaluation, option payments, related acquisition costs for mineral properties acquired under option agreements, general overhead, administrative and holding costs to maintain a property on a care and maintenance basis are expensed in the period they are incurred. When proven and probable mineral reserves are determined for a property, subsequent development costs on the property are capitalized. If a project were to be put into production, capitalized development costs would be depleted on the units of production basis determined by the proven and probable mineral reserves for that project.

Existing proven and probable mineral reserves and value beyond proven and probable mineral reserves, including mineralization other than proven and probable mineral reserves and other material that is not part of the measured, indicated or inferred resource base, are included when determining the fair value of mine site reporting units at acquisition and, subsequently, in determining whether the assets are impaired. The term “recoverable minerals” refers to the estimated amount of silver and other commodities that will be obtained after taking into account losses during mining, mineral resources processing and treatment and ultimate sale. Estimates of recoverable minerals from such exploration-stage mineral interests are risk-adjusted based on management’s relative confidence in such materials. In estimating future cash flows, assets are grouped at the lowest levels for which there are identifiable cash flows that are largely independent of future cash flows from other asset groups. We review and evaluate our long-lived assets for impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Asset impairment is considered to exist if the total estimated future cash flows on an undiscounted basis are less than the carrying amount of the asset. An impairment loss is measured and recorded based on discounted estimated future cash flows. Future cash flows are estimated based on estimated quantities of recoverable minerals, expected silver and other commodity prices (considering current and historical prices, trends and related factors), production levels, operating costs, capital requirements and reclamation costs, all based on LOM plans. No impairment tests have been required during the periods presented.

Various factors could impact our ability to achieve our forecasted production schedules from proven and probable mineral reserves. Additionally, production, capital and reclamation costs could differ from the assumptions used in the cash flow models used to assess impairment. The ability to achieve the estimated quantities of recoverable minerals from exploration-stage mineral interests involves further risks in addition to those factors applicable to mineral interests where proven and probable mineral reserves have been identified, due to the lower level of confidence that the identified mineral resources could ultimately be mined economically. Assets classified as exploration potential have the highest level of risk that the carrying value of the asset can be ultimately realized, due to the still lower level of geological confidence and economic modeling.

Income and Mining Taxes

We recognize the expected future tax benefit from deferred tax assets when the tax benefit is considered to be more likely than not of being realized. Assessing the recoverability of deferred tax assets requires management to make significant estimates related to expectations of future taxable income. Estimates of future taxable income are based on forecasted cash flows and the application of existing tax laws in the United States and Mexico. Refer to “Critical Accounting Policies - Mineral Properties and Carrying Value of Long-Lived Assets” above for a discussion of the factors that could cause future cash flows to differ from estimates. To the extent that future cash flows and taxable income differ significantly from estimates, our ability to realize deferred tax assets recorded at the balance sheet date could be impacted. Additionally, future changes in tax laws in the jurisdictions in which we operate could limit our ability to obtain the future tax benefits represented by our deferred tax assets recorded at the reporting date.

Our properties involve dealing with uncertainties and judgments in the application of complex tax regulations in multiple jurisdictions. The final taxes paid are dependent upon many factors, including negotiations with taxing authorities in various jurisdictions and resolution of disputes arising from federal, 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

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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.

Recently Issued and Adopted Accounting Pronouncements

Refer to Note 2 of our consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data” for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of the date of this Report.

Jumpstart Our Business Startups Act of 2012

The Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) permits us, as an “emerging growth company,” to, among other things, take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for public companies that are not emerging growth companies. The decision to opt out of the extended transition period under the JOBS Act is irrevocable.

Non-GAAP Financial Measures

We use certain measures that are not defined by GAAP to evaluate various aspects of our business. These non-GAAP financial measures are intended to provide additional information only and do not have any standardized meaning prescribed by GAAP and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. The measures are not necessarily indicative of operating profit or cash flow from operations as determined under GAAP.

Cash Costs and All-In Sustaining Costs

Cash costs and all-in sustaining costs (“AISC”) are non-GAAP measures. AISC was calculated based on guidance provided by the World Gold Council (“WGC”). WGC is not a regulatory industry organization and does not have the authority to develop accounting standards for disclosure requirements. Other mining companies may calculate AISC differently as a result of differences in underlying accounting principles and policies applied, as well as definitional differences of sustaining versus expansionary (i.e. non-sustaining) capital expenditures based upon each company’s internal policies. Current GAAP measures used in the mining industry, such as cost of sales, do not capture all of the expenditures incurred to discover, develop and sustain production. Therefore, we believe that cash costs and AISC are non-GAAP measures that provide additional information to management, investors and analysts that aid in the understanding of the economics of the Company’s operations and performance and provides investors visibility by better defining the total costs associated with production.

Cash costs include all direct and indirect operating cash costs related directly to the physical activities of producing metals, including mining, processing and other plant costs, treatment and refining costs, general and administrative costs, royalties and mining production taxes. AISC includes total production cash costs incurred at the LGJV’s mining operations plus sustaining capital expenditures. The Company believes this measure represents the total sustainable costs of producing silver from current operations and provides additional information of the LGJV’s operational performance and ability to generate cash flows. As the measure seeks to reflect the full cost of silver production from current operations, new project and expansionary capital at current operations are not included. Certain cash expenditures such as new project spending, tax payments, dividends, and financing costs are not included.

Reconciliation of expenses (GAAP) to non-GAAP measures

The table below presents a reconciliation between the most comparable GAAP measure of the LGJV’s expenses to the non-GAAP measures of (i) cash costs, (ii) cash costs, net of by-product credits, (iii) co-product all-in sustaining costs and (iv) by-product all-in sustaining costs for our operations.

The calculations for determining co-product and by-product cash cost and co-product and by-product AISC per ounce were updated to include period end accruals for sales (both volume and value for payable metals). In addition, the calculation for determining silver equivalent ounces used for co-product cash cost per ounce and co-product AISC per ounce was updated to include final settlements in the calculation of the realized metal prices. The prior period comparatives were updated to reflect this change; however, the cash cost and AISC per ounce calculated on this basis is not materially different from the cash cost and AISC cost per ounce previously reported.

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Year Ended December 31,

(in thousands, except where otherwise stated)

Cost of sales

Royalties

Exploration

General and administrative

Depreciation, depletion and amortization

Total expenses

Depreciation, depletion and amortization

Exploration 1

Treatment and refining costs 2

Cash costs (A)

Sustaining capital 3

All-in sustaining costs (B)

By-product credits 4

All-in sustaining costs, net of by-product credits (C)

Cash costs, net of by-product credits (D)

Payable ounces of silver equivalent 5 (E)

Co-product cash cost per ounce of payable silver equivalent (A/E)

Co-product all-in sustaining cost per ounce of payable silver equivalent (B/E)

Payable ounces of silver (F)

By-product cash cost per ounce of payable silver (D/F)

By-product all-in sustaining cost per ounce of payable silver (C/F)

1. Exploration costs are not related to current mining operations.

2. Represent reductions on customer invoices and included in Revenue of the LGJV combined statement of income.

3. Sustaining capital excludes resource development drilling costs related to resource development drilling in the South-East Deeps zone.

4. By-product credits reflect realized metal prices of zinc, lead and gold for the applicable period, which includes any final settlement adjustments from prior periods.

5. Silver equivalents utilize the average realized prices during the year ended December 31, 2023, of $24.33/oz silver, $1.10/lb zinc, $0.97/lb lead and $1,818/oz gold and the average realized prices during the year ended December 31, 2022, of $20.72/oz silver, $1.58/lb zinc, $0.90/lb lead and 1,678/oz gold. The average realized prices are determined based on revenue inclusive of final settlements.

Sustaining capital and Resource development drilling

The following table provides a breakdown of cash flows used by investing activities of the LGJV:

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Twelve Months Ended

December 31,

(in thousands)

Cash flow used by investing activities

Sustaining capital

Resource development drilling

Materials & supplies

Amount included in accounts payable

Total

EBITDA

Management uses EBITDA to evaluate the Company’s operating performance, to plan and forecast its operations, and assess leverage levels and liquidity measures. The Company believes the use of EBITDA reflects the underlying operating performance of our core mining business and allows investors and analysts to compare results of the Company to similar results of other mining companies. EBITDA does not represent, and should not be considered an alternative to, net income or cash flow from operations as determined under GAAP. The table below reconciles EBITDA, a non-GAAP measure to Net Income:

Twelve Months Ended

December 31,

(in thousands)

Net income

Interest expense

Interest income

Income tax expense

Depreciation, depletion and amortization

EBITDA

The table below reconciles of EBITDA, a non-GAAP measure, to the LGJV’s Net Income:

Twelve Months Ended

December 31,

(in thousands)

Net income and comprehensive income

Interest income

Interest expense

Income tax expense

Depreciation, depletion and amortization

EBITDA

Free Cash Flow

Management uses Free Cash Flow as a non-GAAP measure to analyze cash flows generated from operations. Free Cash Flow is Cash p rovided by (used in) operating activities less Cash Flow (used in) from investing Activities as presented on the Consolidated Statements of Cash Flows. The Company believes Free Cash Flow is also useful for investors as one of the bases for comparing the Company’s performance with its competitors. Although Free Cash Flow and similar measures are frequently used as measures of cash flows generated from operations by other companies, the Company’s calculation of Free Cash Flow is not necessarily comparable to such other similarly titled captions of other companies.

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The following table sets forth a reconciliation of Free Cash Flow, a non-GAAP financial measure, to net cash (used) provided by operating activities, which the Company believes to be the GAAP financial measure most directly comparable to Free Cash Flow.

Twelve Months Ended

December 31,

(in thousands)

Net cash (used) provided by operating activities

Net cash provided (used) by investing activities

Free cash flow

The following table sets forth a reconciliation of Free Cash Flow, a non-GAAP financial measure, to net cash provided by operating activities for the LGJV.

Twelve Months Ended

December 31,

(in thousands)

Net cash provided by operating activities

Net cash used by investing activities

Free cash flow