UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________

Commission File Number: 001-39649

GATOS SILVER, INC.

(Exact name of registrant as specified in its charter)

Delaware	27-2654848
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

925 W Georgia Street, Suite 910

Vancouver, British Columbia, Canada V6C 3L2

(Address of principal executive offices) (Zip Code)

(604) 424-0984

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001 per share	GATO	New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☑

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☐ No ☑

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☑	Smaller reporting company	☑
		Emerging growth company	☑

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☑

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

The Company has 700,000,000 shares of common stock, par value $0.001, authorized of which 69,162,223 were issued and outstanding as of March 24, 2023.

TABLE OF CONTENTS

		Page
	Part I - FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Shareholders’ Equity (Deficit)	5
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	27
Item 4.	Controls and Procedures	27
	Part II - OTHER INFORMATION
Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3.	Defaults Upon Senior Securities	29
Item 4.	Mine Safety Disclosures	29
Item 5.	Other Information	29
Item 6.	Exhibits	29

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PART I – FINANCIAL INFORMATION

Item 1.Financial Statements

GATOS SILVER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands of United States dollars, except for share and per share amounts)

		March 31,		December 31,
	Notes	2022		2021
ASSETS
Current Assets
Cash and cash equivalents		$	5,284	$	6,616
Related party receivables	5		630		1,592
Other current assets	3		2,850		3,558
Total current assets			8,764		11,766
Non‑Current Assets
Investment in affiliates	12		379,818		355,310
Other non-current assets			28		35
Total Assets		$	388,610	$	367,111
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and other accrued liabilities	4	$	2,557	$	1,406
Non-Current Liabilities
Credit Facility, net of debt issuance costs	10		12,657		12,620
Shareholders' Equity
Common Stock, $0.001 par value; 700,000,000 shares authorized; 69,162,223 shares outstanding as of March 31, 2022 and December 31, 2021			117		117
Paid‑in capital			545,311		543,829
Accumulated deficit			(172,032)		(190,861)
Total shareholders' equity			373,396		353,085
Total Liabilities and Shareholders' Equity		$	388,610	$	367,111

See accompanying notes to the condensed consolidated financial statements.

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GATOS SILVER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In thousands of United States dollars, except for share and per share amounts)

		Three Months Ended
		March 31,
	Notes	2022		2021
Expenses
Exploration		$	110	$	224
General and administrative			6,777		4,853
Amortization			44		7
Total expenses			6,931		5,084
Other income (expense)
Equity income in affiliates	12		24,614		2,701
Arrangement fees			—		(506)
Other income	5		1,146		1,269
Net other income			25,760		3,464
Net income (loss)		$	18,829	$	(1,620)
Net income (loss) per share:	7
Basic		$	0.27	$	(0.03)
Diluted		$	0.27	$	(0.03)
Weighted average shares outstanding:
Basic			69,162,223		59,318,320
Diluted			69,309,019		59,318,320

See accompanying notes to the condensed consolidated financial statements.

4

GATOS SILVER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

(In thousands of United States dollars, except for share amounts)

	Number		Amount
	Common	Treasury	Common		Treasury		Paid‑in		Accumulated
	Stock	Stock	Stock		Stock		Capital		Deficit		Total
Balance at December 31, 2021	69,162,223	—	$	117	$	—	$	543,829	$	(190,861)	$	353,085
Stock‑based compensation	—	—		—		—		1,482		—		1,482
Net income	—	—		—		—		—		18,829		18,829
Balance at March 31, 2022	69,162,223	—	$	117	$	—	$	545,311	$	(172,032)	$	373,396

	Number		Amount
	Common	Treasury	Common		Treasury		Paid-in		Accumulated
	Stock	Stock	Stock		Stock		Capital		Deficit			Total
Balance at December 31, 2020	59,183,076	144,589	$	108	$	(1,027)	$	409,728	$	(147,423)	$	261,386
Stock‑based compensation	—	—		—		—		1,078		—		1,078
Issuance of common stock	182,453	—		—		—		1,559		—		1,559
DSUs converted to common stock	43,523	—		—		—		—		—		—
Other	—	—		—		—		(262)		—		(262)
Net loss	—	—		—		—		—		(1,620)		(1,620)
Balance at March 31, 2021	59,409,052	144,589	$	108	$	(1,027)	$	412,103	$	(149,043)	$	262,141

See accompanying notes to the condensed consolidated financial statements.

5

GATOS SILVER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands of United States dollars)

		Three Months Ended
		March 31,
	Notes	2022		2021
OPERATING ACTIVITIES
Net income (loss)		$	18,829	$	(1,620)
Adjustments to reconcile net income (loss) to net cash used by operating activities:
Amortization			44		7
Stock‑based compensation expense	6		1,588		1,139
Other	6		64		22
Equity income in affiliates	12		(24,614)		(2,701)
Changes in operating assets and liabilities:
Receivables from related‑parties			962		(3,508)
Accounts payable and other accrued liabilities			1,087		(507)
Other current assets			708		579
Net cash used by operating activities			(1,332)		(6,589)
INVESTING ACTIVITIES
Investment in affiliates	12		—		(113,823)
Net cash used by investing activities			—		(113,823)
FINANCING ACTIVITIES
Financing costs			—		(262)
Issuance of common stock			—		1,559
Net cash provided by financing activities			—		1,297
Net decrease in cash and cash equivalents			(1,332)		(119,115)
Cash and cash equivalents, beginning of period			6,616		150,146
Cash and cash equivalents, end of period			5,284		31,031
Interest paid		$	102	$	—

See accompanying notes to the condensed consolidated financial statements.

6

GATOS SILVER, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(In thousands of United States dollars, except share, per share, option, and stock unit amounts)

1.           Basis of Presentation

Basis of Consolidation and Presentation

The financial statements represent the condensed consolidated financial position and results of operations of Gatos Silver, Inc. and its subsidiaries, Gatos Silver Canada Corporation and Minera Luz del Sol S. de R.L. de C.V. Unless the context otherwise requires, references to Gatos Silver or the Company mean Gatos Silver, Inc. and its consolidated subsidiaries.

The interim condensed consolidated financial statements are unaudited, but include all adjustments, consisting of normal recurring entries, which are 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 have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information. Accordingly, they do not include all financial information and disclosures required by GAAP for complete financial statements and should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 10-K”).

2.           Summary of Significant Accounting Policies

Significant Accounting Policies

The consolidated financial statements for the year ended December 31, 2021, disclose those accounting policies considered significant in determining 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 the 2021 10-K.

Recent Accounting Pronouncements

There have been no accounting pronouncements issued or adopted during the three months ended March 31, 2022, which are expected to have a material impact on the financial statements.

3.           Other Current Assets

	March 31, 2022		December 31, 2021
Value added tax receivable	$	624	$	575
Prepaid expenses		2,219		2,976
Other		7		7
Total other current assets	$	2,850	$	3,558

4.           Accounts Payable and Other Accrued Liabilities

	March 31, 2022		December 31, 2021
Accounts payable	$	330	$	196
Accrued expenses		1,129		623
Accrued compensation		1,098		587
Total accounts payable and other current liabilities	$	2,557	$	1,406

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5.           Related-Party Transactions

LGJV

Under the Unanimous Omnibus Partner Agreement, the Company provides certain management and administrative services to the LGJV. The Company earned $1,250 and $1,250 under this agreement for the three months ended March 31, 2022 and 2021, respectively. The income from these services has been recorded on the statements of operations under other income. In the March 31, 2021 unaudited financial statements filed on Form 10-Q, the management fee was presented as a reduction to general and administrative expense and is now presented in other income to be consistent with the 2021 10-K. The Company also incurs certain LGJV costs that are subsequently reimbursed by the LGJV. The Company received $1,667 and nil in cash from the LGJV under this agreement for the three months ended March 31, 2022 and 2021, respectively. The Company had receivables under this agreement of $417 and $833 as of March 31, 2022 and December 31, 2021, respectively.

6.           Stockholders’ Equity

The Company is authorized to issue 700,000,000 shares of $0.001 par value common stock and 50,000,000 shares of $0.001 par value preferred stock.

Common Stock Transactions

On July 19, 2021, the Company completed a follow-on public offering of 8,930,000 shares of common stock at a price of $14.00 per share, resulting in net proceeds of $118,894, after deducting underwriting discounts and commissions. On August 18, 2021, the Company issued an additional 286,962 shares of common stock at a price of $14.00 per share, through the exercise of the over-allotment option, with net proceeds from the additional issuance of $3,837, after deducting underwriting discounts and commissions. Additionally,the Company incurred an additional $1,700 in other costs related to the offering.

Stock-Based Compensation

The Company recognized stock-based compensation expense as follows:

	Three months ended March 31,
	2022		2021
Stock options	$	1,448	$	1,139
Performance share units		140		—
	$	1,588	$	1,139

Stock Option Transactions

The Company granted 100,000 stock options during the three months ended March 31, 2022, with a weighted-average grant-date fair value per share of $5.83. The Company received cash from the exercise of stock options of nil and $1,559 for the three months ended March 31, 2022 and 2021, respectively.

Total unrecognized stock-based compensation expense as of March 31, 2022, was $9,435 which is expected to be recognized over a weighted average period of 2.0 years.

8

Stock option activity for the three months ended March 31, 2022, is summarized in the following tables:

		Weighted‑
		Average
Employee & Director Options	Shares	Exercise Price
Outstanding at December 31, 2021	5,873,968	$	13.11
Granted	100,000	$	10.28
Forfeited	(9,751)	$	11.62
Outstanding at March 31, 2022	5,964,217	$	13.07
Vested at March 31, 2022	3,957,418	$	14.19

		Weighted‑
		Average
LGJV Personnel Options	Shares	Exercise Price
Outstanding at December 31, 2021	32,393	$	7.31
Outstanding and vested at March 31, 2022	32,393	$	7.31

Performance Share Unit (“PSU”) Transactions

On December 17, 2021, 119,790 PSUs were granted to the Company’s employees with a weighted average grant date fair value per share of $14.22. On March 31, 2022, unrecognized compensation expense related to the PSUs was $1,542 which is expected to be recognized over a weighted-average period of 2.7 years.

Deferred Stock Unit (“DSU”) Transactions

The following table summarizes the DSU activity for the three months ended March 31, 2022:

		Weighted-Average
		Grant Date
Director DSUs	Shares	Fair Value
Outstanding at December 31, 2021	146,796	$	10.88
Outstanding at March 31, 2022	146,796	$	10.88

7.           Net Income (Loss) per Share

Basic net income (loss) per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed similarly, except that weighted-average common shares are increased to reflect the potential dilution that would occur if stock options were exercised or PSUs and DSUs were converted into common stock. The dilutive effects are calculated using the treasury stock method.

For the three months ended March 31, 2022, all stock options have been excluded from the dilutive earnings per common share calculation as the exercise price of these stock options was greater than the average market value of our common stock for those periods, resulting in an anti-dilutive effect. For the three months ended March 31, 2022, all PSUs were excluded from the diluted earnings per common share calculation as the PSUs do not currently meet the criteria for issuance. For the three months ended March 31, 2021, the Company experienced a net loss, thus all stock awards outstanding have been excluded as they are anti-dilutive.

9

A reconciliation of basic and diluted earnings per common share for the three months ended March 31, 2022 and 2021, are as follows:

	Three Months Ended March 31,
	2022		2021
Net income (loss)	$	18,829	$	(1,620)
Weighted average shares:
Basic		69,162,223		59,318,320
Effect of dilutive DSUs		146,796		—
Diluted		69,309,019		59,318,320
Net income (loss) per share:
Basic	$	0.27	$	(0.03)
Diluted	$	0.27	$	(0.03)

8.         Fair Value Measurements

The Company establishes a framework for measuring the fair value of assets and liabilities 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.

Assets and Liabilities that are Measured at Fair Value on a Non-recurring Basis

The Company discloses and recognizes its non-financial assets and liabilities at fair value on a non-recurring basis and makes adjustments to fair value, as needed (for example, when there is evidence of impairment).

The Company recorded its initial investment in affiliates at fair value within 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. For the year ended December 31, 2021, the Company recorded impairment charges associated with the investment in the LGJV, and reduced the carrying amount of such asset subject to the impairment to their estimated fair value. See Note 12 – Investment in Affiliates for additional information on the impairment.

9.         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.

10

Environmental Contingencies

The Company’s mining and exploration activities are subject to various laws, regulations and permits governing the protection of the environment. These laws, regulations and permits are continually changing and are generally becoming more restrictive. The Company has made, and expects to make in the future, expenditures to comply with such laws, regulations and permits, but cannot predict the full amount of such future expenditures.

Legal

On February 22, 2022, a purported Gatos stockholder filed a putative class action lawsuit in the United States District Court for the District of Colorado against the Company, certain of our former officers, and several directors. An amended complaint was filed on August 15, 2022. The amended complaint, allegedly brought on behalf of certain purchasers of Gatos common stock and certain traders of call and put options on Gatos common stock from December 9, 2020 through January 25, 2022, seeks, among other things, damages, costs, and expenses, and asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 as well as Sections 11 and 15 of the Securities Act of 1933. The amended complaint alleges that certain individual defendants and Gatos, pursuant to the control and authority of the individual defendants, made false and misleading statements and/or omitted certain material information regarding the mineral resources and reserves at the Cerro Los Gatos mine. Gatos and all defendants filed a motion to dismiss this action on October 14, 2022. That motion was fully briefed as of December 23, 2022.

By Notice of Action issued February 9, 2022 and subsequent Statement of Claim dated March 11, 2022 Izabela Przybylska commenced a putative class action against Gatos Silver, Inc. (“Gatos”), certain of its former officers and directors, and others in the Ontario Superior Court of Justice on behalf of a purported class of all persons or entities, wherever they may reside or be domiciled, who acquired securities of Gatos in both the primary and secondary markets during the period from October 28, 2020 until January 25, 2022. The action asserts claims under Canadian securities legislation and at common law and seeks unspecified monetary damages and other relief in respect of allegations the defendants made false and misleading statements and omitted material information regarding the mineral resources and reserves of Gatos. The plaintiff filed motion materials for leave to proceed in respect of her statutory claims and for class certification on March 3, 2023. The court has tentatively set dates in late March of 2024 for the hearing of the plaintiff’s motions.

There can be no assurance that any of the foregoing matters individually or in aggregate will not result in outcomes that are materially adverse for us.

Dowa Debt Agreements

In July 2017, the LGJV operating entities consisting of Minera Plata Real S. de R.L. de C.V (“MPR”) and Operaciones San Jose del Plata S. de R.L. de C.V. (collectively, the “LGJV Entities”) entered into a loan agreement (the “Term Loan”) with Dowa whereby the LGJV Entities could borrow up to $210,000 for Los Gatos District (“LGD”) development, with a maturity date of December 29, 2027. Interest on the Term Loan accrued daily at LIBOR plus 2.35% per annum, with the interest added to the amount borrowed until commencement of production. During 2018, the LGJV paid Dowa a $4,200 closing fee. Commencing June 30, 2021, repayment of the Term Loan in 14 consecutive semi-annual equal payments of the aggregate principal and capitalized interest began. The Company was required to pay an arrangement fee on the borrowing, calculated as 2% per annum of 70% of the outstanding principal balance, payable in semi-annual installments, on that date which was two business days prior to June 30 and December 31 each fiscal year until maturity, commencing after the initial drawdown which occurred in July 2018. The Term Loan also required additional principal payments equal to 70% of excess cash flows (as defined).

On July 26, 2021, the Term Loan was repaid in full through capital contributions made to the LGJV by the Company and Dowa in pro-rata amounts equal to their ownership in the LGJV of 70% and 30%, respectively. In conjunction with the repayment, the Company paid a fee to Dowa of $10,000.

On January 23, 2018, the LGJV entered into a loan agreement with Dowa (the “Dowa MPR Loan”) whereby the LGJV could borrow up to $65,700 to continue LGD development. Interest on this loan accrued daily at LIBOR plus 1.5% per annum and was added to the amount borrowed. The amount borrowed plus accrued interest was due the earlier of June 30, 2019, or upon the Cerro Los Gatos mine’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.

11

In connection with entering into the WCF (as defined below), the Company contributed $18,200 to the LGJV in May 2019 to provide funding for partial repayment of principal and interest related to the Dowa MPR Loan. In late May 2019, the Dowa MPR Loan was fully extinguished with a cash payment of $18,200 and the conversion of the remaining $50,737 of principal and interest. The conversion of the remaining principal and interest increased Dowa’s ownership in the LGJV entities by 18.5% to 48.5%. On March 11, 2021, the Company repurchased the 18.5% interest from Dowa, for a total consideration of $71,550, increasing the Company’s ownership in the LGJV to 70.0%. These transactions resulted in a $47,400 higher basis than the underlying net assets of the LGJV Entities. This basis difference is being amortized as the LGJV Entities’ proven and probable reserves are processed.

On May 30, 2019, the LGJV entered into a working capital facility agreement (the “WCF”) with Dowa whereby the LGJV could borrow up to $60,000 to fund the working capital and sustaining capital requirements of the LGD. Interest on this loan accrued daily at LIBOR plus 3.0% per annum and all outstanding principal and interest was to mature on June 28, 2021. The Company was 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. On March 11, 2021, the $60,000 outstanding under the WCF was extinguished using funds contributed to the LGJV. The Company’s pro-rata capital contribution to the LGJV was $42,000.

The Company guarantees the payment of all obligations, including accrued interest, under the LGJV equipment loan agreements. As of March 31, 2022, the LGJV had $4,059 outstanding under the LGJV equipment loan agreements, net of unamortized debt discount of $10, with maturity dates through August 2023.

10.         Debt

On July 12, 2021, the Company entered into a Revolving Credit Facility (the “Credit Facility”). The Credit Facility provides for a revolving line of credit in a principal amount of $50,000 and has an accordion feature which at the time allowed for an increase in the total line of credit up to $100,000, subject to certain conditions. Borrowings under the Credit Facility bear interest at a rate equal to either the LIBOR rate plus a margin ranging from 3.00% to 4.00% or the U.S. Base Rate plus a margin ranging from 2.00% to 3.00%, as selected by the Company, in each case, with such margin determined in accordance with the Company’s consolidated net leverage ratio as of the end of the applicable period. The Credit Facility contains affirmative and negative covenants that are customary for credit agreements of this nature. The affirmative covenants consist of a leverage ratio, a liquidity covenant and an interest coverage ratio. The negative covenants include, among other things, limitations on asset sales, mergers, acquisitions, indebtedness, liens, dividends and distributions, investments and transactions with affiliates. Obligations under the Credit Facility may be accelerated upon the occurrence of certain customary events of default. The Company was in compliance with all covenants under the Credit Facility, as amended, as of March 31, 2022.

On July 19, 2021, the Company borrowed $13,000 under the Credit Facility at a rate of LIBOR plus 3%. Debt issuance costs of $442 were to be amortized through July 31, 2024, prior to the amended and restated Credit Facility (see terms below). The current balance outstanding on the Credit Facility is $9,000, following a $4,000 principal repayment in December 2022.

The Company recognized interest expense of $103, with an effective interest rate of 3.2% which has been recorded on the statements of operations under other income, and $37 for amortization of debt issuance costs, for the three months ended March 31, 2022. The Company paid interest of $102 for the three months ended March 31, 2022.

On March 7, 2022, the Company amended the Credit Facility with the lender, Bank of Montreal (“BMO”), to address potential loan covenant deficiencies. The amendment includes the following revisions:

● audited financial statements were to be provided prior to November 15, 2022;

● the credit limit was reduced to $30,000, until the Company delivers a new LOM Cerro Los Gatos (“CLG”) financial model with updated mineral reserves;

● upon assessment of the new CLG financial model, BMO, in its sole discretion, may increase the credit limit up to the original $50,000;

● requirement to provide updated financial projections for the CLG by September 30, 2022. The financial projections were provided by the required date and it was used as the basis for the amendment entered into on December 19, 2022 discussed below; and

12

● waivers of certain defaults, events of default, representations and warranties and covenants arising out of the facts that led to the potential reduction in metal content of the Company’s previously stated mineral reserve figures.

On December 19, 2022, the Company entered an amended and restated Credit Facility with BMO extending the maturity date and re-establishing a credit limit of $50,000, with an accordion feature providing up to an additional $25,000. Key terms of the amended Credit Facility include:

● audited financial statements for fiscal year 2021 are to be provided no later than April 15, 2023, and audited financial statements for fiscal year 2022 and unaudited financial statements for the first three fiscal quarters in fiscal year 2022 are to be provided no later than April 30, 2023;

● the maturity date is extended from July 31, 2024 to December 31, 2025;

● a change in the benchmark interest rate from LIBOR to the Secured Overnight Financing Rate (“SOFR”); and

● loans under the Revolver bear interest at a rate equal to either a term SOFR rate plus a margin ranging from 3.00% to 4.00% or a U.S. base rate plus a margin ranging from 2.00% to 3.00%, as selected by the Company.

11.          Segment Information

The Company operates in a single industry as a corporation engaged in the acquisition, exploration and development of primarily silver mineral interests. The Company has mineral property interests in Mexico. The Company’s reportable segments are based on the Company’s mineral interests and management structure and include Mexico and Corporate segments. The Mexico segment engages in the exploration, development and operation of the Company’s Mexican mineral properties and includes the Company’s investment in the LGJV. Financial information relating to the Company’s segments is as follows:

	Three Months Ended March 31, 2022						Three Months Ended March 31, 2021
	Mexico		Corporate		Total		Mexico		Corporate		Total
Exploration	$	110	$	—	$	110	$	224	$	—	$	224
General and administrative		609		6,168		6,777		154		4,699		4,853
Amortization		—		44		44		—		7		7
Arrangement fees		—		—		—		—		506		506
Equity (income) loss in affiliates		(24,614)		—		(24,614)		(2,701)		—		(2,701)
Net other (income) expense		2		(1,148)		(1,146)		14		(1,283)		(1,269)
Total assets	$	98,788	$	289,822	$	388,610	$	42,197	$	223,483	$	265,680

13

12.         Investment in Affiliate

During the three months ended March 31, 2022 and 2021, the Company recognized $24,614 and $2,701 of income, respectively, on its investment in the LGJV Entities, representing its ownership share of the LGJV Entities’ results. The equity income in affiliates includes amortization of the carrying value of the investment in excess of the underlying net assets of the LGJV Entities. This basis difference is being amortized as the LGJV Entities’ proven and probable reserves are processed.

The Company provided an updated technical report compliant with Regulation S-K subpart 1300 (the “Los Gatos Technical Report”) dated November 10, 2022. The Los Gatos Technical Report indicated a significant decrease in the mineral reserve and mineral resource from the previously issued technical report in 2020. The Company considered this reduction in the mineral reserve and mineral resources as an indicator of a possible other-than-temporary impairment and as a result compared the carrying value of the LGJV on December 31, 2021 to the fair value of the LGJV.

The fair value of the LGJV was estimated based on the net present value of the expected cash flows to be generated by the LGJV on 70% basis. The discount rate used was 5.00%. The fair value of the investment in the LGJV was estimated to be $355,310 and the carrying value at December 31, 2021 was $406,874. Since the carrying value exceeded the fair value, an impairment charge of $51,564 was recorded during the fourth quarter of 2021. See Note 8 - Fair Value Measurements for additional detail of the assumptions used in the determination of the fair value of the long-lived assets tested for impairment.

For the year ended December 31, 2021, the Company contributed $260,039 to the LGJV to repurchase 18.5% of the ownership of the LGJV, to retire the WCF and the Term Loan and in support of exploration activities.

The LGJV Entities combined balance sheets as of March 31, 2022, and December 31, 2021, and the combined statements of income for the three months ended March 31, 2022 and 2021, are as follows:

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LOS GATOS JOINT VENTURE

COMBINED BALANCESHEETS (UNAUDITED)

(in thousands)

	March 31,		December 31,
	2022		2021
ASSETS
Current Assets
Cash and cash equivalents	$	41,231	$	20,280
Receivables		19,396		11,263
Inventories		12,156		11,062
VAT receivable		31,845		46,242
Other current assets		9,434		4,515
Total current assets		114,062		93,362
Non‑Current Assets
Mine development, net		232,950		229,076
Property, plant and equipment, net		192,940		190,896
Net deferred tax assets		21,623		9,226
Total non‑current assets		447,513		429,198
Total Assets	$	561,575	$	522,560
LIABILITIES AND OWNERS' CAPITAL
Current Liabilities
Accounts payable and accrued liabilities	$	35,854	$	33,179
Related party payable		632		1,609
Accrued interest		27		51
Income taxes		9,965		6,315
Equipment loans		3,855		5,534
Unearned Revenue		—		1,714
Total current liabilities		50,333		48,402
Non‑Current Liabilities
Equipment loans		204		478
Lease liability		313		—
Reclamation obligations		14,982		14,706
Total non‑current liabilities		15,499		15,184
Owners' Capital
Capital contributions		540,638		540,638
Paid‑in capital		18,219		18,370
Accumulated deficit		(63,114)		(100,034)
Total owners' capital		495,743		458,974
Total Liabilities and Owners' Capital	$	561,575	$	522,560

15

LOS GATOS JOINT VENTURE

COMBINED STATEMENTS OF INCOME (UNAUDITED)

(in thousands)

	Three Months Ended
	March 31,
	2022		2021
Revenue	$	87,608	$	46,330
Expenses
Cost of sales		25,088		19,805
Royalties		1,494		884
Exploration		2,121		649
General and administrative		2,820		3,246
Depreciation, depletion and amortization		16,342		10,949
Total operating expenses		47,865		35,533
Other expense
Interest expense		91		2,117
Accretion expense		276		228
Other income		(1,339)		(30)
Foreign exchange (gain) loss		(691)		1,630
Total other (income) expense		(1,663)		3,945
Income before income and mining taxes		41,406		6,852
Income and mining tax expense		(4,486)		—
Net income	$	36,920	$	6,852

13.         Subsequent Events

On March 17, 2022, we entered into a definitive agreement with Dowa to build and operate a leaching plant to reduce fluorine levels in zinc concentrates produced at CLG at an expected construction cost of $6,000. As part of the agreement, the initial payment of the $20,000 due to Dowa under the partner’s priority distribution agreement was reduced to $10,300. The reduced priority dividend amount reflects a portion of both the construction and future estimated operating costs of the leaching plant and is dependent on the successful construction and operation of the leaching plant. Should the leaching plant construction not be completed, or the leaching plant not operate according to certain parameters during the first five years, portions of the $9,700 reduction could be reinstated.

In April 2022, the LGJV paid its first dividend of $20,000 to its partners. The Company’s share of the first dividend was $14,000, before withholding taxes of $700. A payment of $7,365 was subsequently made to Dowa to cover the full amount of the reduced initial priority distribution due, for a net dividend received of $5,935.

In July 2022 and November 2022, the LGJV paid additional dividends in the amount of $15,000 and $20,000, respectively, to its partners. The Company’s share, after withholding taxes of $525 and $700, respectively, was $9,975 and $13,300, respectively, for the July 2022 and November 2022 dividend payments.

On December 19, 2022, the Company entered into an amended and restated Credit Facility with BMO extending the maturity date and re-establishing a credit limit of $50,000, with an accordion feature, as further described above.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion provides information that management believes is relevant to an assessment and understanding of the consolidated financial condition and results of operations of the Company and should be read in conjunction with the Company’s consolidated financial statements and related notes and other information included elsewhere in this Quarterly Report on Form 10-Q (the “Report”) and the Company’s audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2021 and the related “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” both of which are contained in our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 10-K”), filed with the Securities and Exchange Commission (“SEC”) on March 20, 2023.

Forward-Looking Statements

This Report contains statements that constitute “forward looking information” and “forward-looking statements” within the meaning of U.S. and Canadian securities laws, including the Private Securities Litigation Reform Act of 1995. Forward-looking statements are often identified by words such as “may,” “might,” “could,” “would,” “achieve,” “budget,” “scheduled,” “forecasts,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” the negative of these terms and other comparable terminology. These forward-looking statements may include, but are not limited to, the following:

● estimates of future mineral production and sales;

● estimates of future production costs, other expenses and taxes for specific operations and on a consolidated basis;

● estimates of future cash flows and the sensitivity of cash flows to gold, copper, silver, lead, zinc and other metal prices;

● estimates of future capital expenditures, construction, production or closure activities and other cash needs, for specific operations and on a consolidated basis, and expectations as to the funding or timing thereof;

● estimates as to the projected development of certain ore deposits, including the timing of such development, the costs of such development and other capital costs, financing plans for these deposits and expected production commencement dates;

● estimates of mineral reserves and mineral resources statements regarding future exploration results and mineral reserve and mineral resource replacement and the sensitivity of mineral reserves to metal price changes;

● statements regarding the availability of, and terms and costs related to, future borrowing or financing and expectations regarding future debt repayments;

● statements regarding future dividends and returns to shareholders;

● estimates regarding future exploration expenditures, programs and discoveries;

● statements regarding fluctuations in financial and currency markets;

● estimates regarding potential cost savings, productivity, operating performance and ownership and cost structures;

● expectations regarding statements regarding future transactions, including, without limitation, statements related to future acquisitions and projected benefits, synergies and costs associated with acquisitions and related matters;

● expectations of future equity and enterprise value;

● expectations regarding the start-up time, design, mine life, production and costs applicable to sales and exploration potential of our projects;

● statements regarding future hedge and derivative positions or modifications thereto;

● statements regarding local, community, political, economic or governmental conditions and environments;

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● statements and expectations regarding the impacts of COVID-19 and variants thereof and other health and safety conditions;

● statements regarding the impacts of changes in the legal and regulatory environment in which we operate, including, without limitation, relating to regional, national, domestic and foreign laws;

● statements regarding climate strategy and expectations regarding greenhouse gas emission targets and related operating costs and capital expenditures;

● statements regarding expected changes in the tax regimes in which we operate, including, without limitation, estimates of future tax rates and estimates of the impacts to income tax expense, valuation of deferred tax assets and liabilities, and other financial impacts;

● estimates of income taxes and expectations relating to tax contingencies or tax audits;

● estimates of future costs, accruals for reclamation costs and other liabilities for certain environmental matters, including without limitation, in connection with water treatment and tailings management;

● statements relating to potential impairments, revisions or write-offs, including without limitation, the result of fluctuation in metal prices, unexpected production or capital costs, or unrealized mineral reserve potential;

● estimates of pension and other post-retirement costs;

● statements regarding estimates of timing of adoption of recent accounting pronouncements and expectations regarding future impacts to the financial statements resulting from accounting pronouncements;

● estimates of future cost reductions, synergies, savings and efficiencies in connection with full potential programs and initiatives; and

● expectations regarding future exploration and the development, growth and potential of operations, projects and investments, including in respect of the CLG and the LGD.

Where we express an expectation or belief as to future events or results, such expectation or belief is expressed in good faith and believed to have a reasonable basis. However, our forward-looking statements are subject to risks, uncertainties and other factors, which could cause actual results to differ materially from future results expressed, projected or implied by those forward-looking statements.

All forward-looking statements speak only as of the date on which they are made. These statements are not a guarantee of future performance and involve certain risks, uncertainties and assumptions concerning future events that are difficult to predict. Therefore, actual future events or results may differ materially from these statements. Such factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements included in this Report and those described from time to time in our filings with the U.S. Securities and Exchange Commission (“SEC”), including, but not limited to, our 2021 10-K. These risks and uncertainties, as well as other risks of which we are not aware or which we currently do not believe to be material, may cause our actual future results to be materially different than those expressed in our forward-looking statements. Undue reliance should not be placed on these forward-looking statements. We do not undertake any obligation to make any revisions to these forward-looking statements to reflect events or circumstances after the date of this filing or to reflect the occurrence of unanticipated events, except as required by law. Certain forward-looking statements are based on assumptions, qualifications and procedures which are set out only in the Los Gatos Technical Report. For a complete description of assumptions, qualifications and procedures associated with such information, reference should be made to the full text of the Los Gatos Technical Report.

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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.

First Quarter 2022 Highlights

Gatos Silver

● The Company recorded net income of $18.8 million in Q1 2022 compared to a net loss of $1.6 million in Q1 2021 primarily due to $21.9 million increase in equity income from the LGJV;

● On January 25, 2022, the Company announced that, during our mineral resource and mineral reserve update process for the LGJV, we concluded that there were errors in the technical report for the CLG with an effective date of July 1, 2020, as well as indications that there may be an overestimation in the resource model. The Company provided an updated technical report (the Los Gatos Technical Report) dated November 10, 2022; and

● The cash balance at March 31, 2022 was $5.3 million compared to $6.6 million at December 31, 2021, and access to the Credit Facility was maintained albeit at a reduced level. On December 19, 2022, the Credit Facility was extended and the availability under the Credit Facility has been restored.

LGJV

Operational highlights

● The processing plant processed an average of 2,611 tonnes per day during the quarter, 4% greater than nameplate design capacity, while continuing to rapidly respond to threats from the COVID-19 pandemic through effective operational plans and procedures to protect our workforce;

● Silver production was 2.4 million ounces in Q1 2022, a 60% increase over the 1.5 million ounces of silver produced in Q1 2021.The bulk of production for the quarter was sourced from the Central Zone, with higher productivity long hole production from this area which was originally designed for cut and fill mining methods;

● Metal recoveries at the LGJV exceeded design rates for payable metals with silver recovery averaging 89.7%, zinc recovery averaging 64.3% and lead recovery averaging 89.2%;

● The LGJV made significant progress on key infrastructure projects, including the installation of underground dewatering equipment, the construction of the paste plant and the construction of the tailings dam raise. These projects are designed to support increased productivity and reduce unit costs, and were subsequently completed;

● The Company signed an agreement with Dowa for the LGJV to construct a leach plant that will reduce the fluorine content of zinc concentrates. The agreement allowed for a reduction in the initial priority dividend payable to Dowa by the LGJV as a mechanism for Dowa to cover a higher proportion of the construction and operating costs for the leach plant; and

● During the quarter, the LGJV reached an agreement with a Mexican energy supplier to provide 100% of CLG’s electrical power requirements from renewable energy sources. This agreement allows CLG to significantly reduce its dependency on fossil fuels, resulting in a material reduction to CLG’s carbon footprint.

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Financial highlights

● Revenues of $87.6 million increased 89% in Q1 2022 compared to the same period in 2021, primarily due the increase in metal production and higher realized metal prices;

● Cost of sales totaled $25.1 million in Q1 2022, 27% higher than Q1 2021, primarily due to increased production. Co-product cash cost per ounce of payable silver equivalent and by-product cash cost per ounce of payable silver decreased by 37% and 96% respectively, to $9.51 and $0.42, respectively, for the quarter ended March 31, 2022;

● Co-product all-in sustaining cost per ounce of payable silver equivalent and by-product all-in sustaining cost per ounce of payable silver decreased by 32% and 57% respectively, to $14.43 and $8.46, respectively, for the quarter ended March 31, 2022; and

● LGJV net income totaled $36.9 million for Q1 2022 compared to $6.9 million in Q1 2021.

Results of Operations

Results of operations Gatos Silver

The following table presents selected financial information for the three months ended March 31, 2022 (“Q1 2022”) and 2021 (“Q1 2021”). 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).

	Three Months Ended
	March 31,
		2022		2021
Expenses
Exploration	$	110	$	224
General and administrative		6,777		4,853
Amortization		44		7
Total expenses		6,931		5,084
Other income (expense)
Equity income in affiliates		24,614		2,701
Arrangement fees		—		(506)
Other income		1,146		1,269
Net other income		25,760		3,464
Net income (loss)	$	18,829	$	(1,620)
Net income (loss) per share:
Basic	$	0.27	$	(0.03)
Diluted	$	0.27	$	(0.03)

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Gatos Silver

Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021

General and administrative expenses

During the three months ended March 31, 2022, we incurred general and administration expense of $6.8 million compared to $4.9 million for the three months ended March 31, 2021. The $1.9 million increase is due to higher legal fees of $1.0 million attributable to legal consultation regarding the mineral resource and mineral reserve errors in the July 2020 technical report for CLG, higher consulting fees of $0.4 million and higher compensation expense of $0.3 million incurred in Q1 2022.

Equity income in affiliates

The increase in equity income resulted primarily from the LGJV recording net income of $36.9 million in Q1 2022 compared to $6.9 million in Q1 2021. The increase in net income at the LGJV was primarily due to the increase sales volumes and higher realized metals prices for Q1 2022 compared to Q1 2021. See “Results of operations LGJV” below.

Net income (loss)

For the quarter ended March 31, 2022, we recorded net income of $18.8 million, or $0.27 per diluted share, compared to a net loss of $1.6 million, or $0.03 per diluted share, for the quarter ended March 31, 2021, mainly due to the increase in equity income in affiliates as described above.

21

Results of operations LGJV

The following table presents operational information of the LGJV for the three months ended March 31, 2022 and 2021 and select financial information of the LGJV for the three months ended March 31, 2022 and 2021. The financial and operational information of the LGJV and CLG is shown on a 100% basis.

	For the three months ended
	March 31,
Financial	2022			2021
Amounts in thousands
Revenue	$	87,608		$	46,330
Cost of sales		25,088			19,805
Royalties		1,494			884
Exploration		2,121			649
General and administrative		2,820			3,246
Depreciation, depletion and amortization		16,342			10,949
Other (income) expense		(1,663)			3,945
Income and mining tax expense		4,486			—
Net income		36,920			6,852
Sustaining capital	$	17,773		$	12,216
	For the three months ended
	March 31,
Operating Results		2022			2021
Tonnes milled (dmt)		234,985			203,479
Tonnes milled per day (dmt)		2,611			2,261
Average Grades
Silver grade (g/t)		353			261
Zinc grade (%)		4.13			3.26
Lead grade (%)		2.22			2.01
Gold grade (g/t)		0.30			0.32
Contained Metal
Silver ounces (millions)		2.4			1.5
Zinc pounds – in zinc conc. (millions)		13.8			8.7
Lead pounds – in lead conc. (millions)		10.3			7.6
Gold ounces – in lead conc. (thousands)		1.3			1.2
Recoveries1
Silver – in both lead and zinc concentrates		89.7	%		85.5	%
Zinc – in zinc concentrate		64.3	%		59.4	%
Lead – in lead concentrate		89.2	%		84.5	%
Gold – in lead concentrate		57.1	%		56.5	%
Average realized price per silver ounce2	$	23.84		$	24.15
Average realized price per zinc pound2	$	1.74		$	1.16
Average realized price per lead pound2	$	1.09		$	0.93
Average realized price per gold ounce2	$	1,870		$	1,812
Co-product cash cost per ounce of payable silver equivalent3	$	9.51		$	15.21
By-product cash cost per ounce of payable silver3	$	0.42		$	10.44
Co-product AISC per ounce of payable silver equivalent3	$	14.43		$	21.29
By-product AISC per ounce of payable silver3	$	8.46		$	19.76

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

(2) Realized prices include the impact of final settlement adjustments from sales.

(3) See “Non-GAAP Financial Measures” below.

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LGJV

Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021

Revenue

The LGJV’s concentrate sales for the three months ended March 31, 2022 and 2021, are summarized below (in thousands):

	Three Months Ended March 31,
	2022		2021
Lead concentrate revenue	$	60,082	$	41,549
Zinc concentrate revenue		27,228		11,934
Treatment and refining charges		(4,964)		(6,722)
Subtotal		82,346		46,761
Provisional revenue adjustments		5,262		(431)
Revenue	$	87,608	$	46,330

Revenue increased by 89% in Q1 2022 compared to Q1 2021, primarily as a result of an increase in concentrate sales and realized metal prices in Q1 2022. The increase in concentrate sales were primarily due to higher zinc and lead concentrate production of 59% and 36%, respectively, and higher realized zinc and lead prices of 50% and 17%, respectively. In addition, silver, zinc and lead ore grades processed increased 35%, 27% and 10%, respectively. Provisional revenue represents potential future settlement adjustments based on commodity price fluctuations in concentrate sales volumes still subject to final settlement. Provisional revenue increased period over period primarily due to increases in actual and forward metals prices from the beginning of Q1 2022 to the end of Q1 2022. At the end of Q1 2021, lead prices decreased from the beginning of the period partially offset by a slight increase in silver prices over this period.

Cost of sales

Cost of sales increased by 27% primarily as a result of the increase in production and higher input costs and to a lesser extent higher input costs due to inflation. Co-product cash cost per ounce of payable silver equivalent and by-product cash cost per ounce of payable silver decreased by 37% and 96% respectively, to $9.51 and $0.42, respectively, for the quarter ended March 31, 2022, primarily attributable to higher metal production during Q1 2022.

Royalties

Royalty expense increased by $0.6 million in Q1 2022 due to increased revenue resulting primarily from the increase in metal prices and increase in sales volumes during Q1 2022.

Exploration

Exploration expense increased by $1.5 million in Q1 2022 mainly due to additional drilling for CLG, Esther and the Los Gatos District exploration targets.

General and Administrative

General and administrative expense for Q1 2022 was 13% lower as compared to Q1 2021 primarily due to reduced COVID-19 related costs.

Depreciation, depletion and amortization

Depreciation, depletion, and amortization expense increased by approximately 49% quarter over quarter primarily as a result of an increase in tonnes mined and also due to the decrease in the mineral reserve and the shorter mine life based on the Los Gatos Technical Report dated November 10, 2022. The lower mineral reserve tonnes and shorter life-of-mine reduced the basis for the depreciation and as a result increased the depreciation, depletion, and amortization expense incurred in Q1 2022.

23

Other (income) expense

Other (income) expense changed primarily due to a 96% decrease in interest expense due to lower interest rates, lower borrowings and lower arrangement fees incurred during Q1 2022 compared to Q1 2021 as a result of the retirement of the WCF and the Term Loan in March 2021 and July 2021, respectively.

Net income

In Q1 2022, the LGJV had net income of $36.9 million compared to $6.9 million for Q1 2021. The change in net income was primarily due to the significant increase in revenue driven by the strong improvement in sales volumes and metals prices during period, partially offset by an increase in cost of sales, royalties, depreciation, depletion and amortization and income and mining tax expense. In addition, interest expense decreased 96% due to lower borrowings and lower arrangement fees resulting from the retirement of the WCF and Term Loan.