Gatos Silver, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Goros Silver Q3 2020 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this time, you will need to press star 1 on your telephone keypad. If you require any further assistance at any time, please press star 0. I would now like to hand the conference over to your speaker today, Stephen Orr, CEO. Please go ahead.

Good morning. I would like to welcome everyone to GatoSilver's inaugural earnings call as a public company. And today we're going to be covering the earnings for the third quarter of 2020. However, before I proceed with the discussion on the company's performance, I'd like to call your attention to this cautionary note on slide two. I will be making forward-looking statements which are not guarantees of future performance and involve certain risks, uncertainties, and assumptions concerning future events. So who is Gato Silver? Well, Gato Silver was founded in 2010 by the Electrum Group. It was a very successful institutional investor in the resource industry. And we've been held as a private company until late in October in 2020 when we conducted an initial public offering with a dual listing on the New York Stock Exchange and the TSX. The company controls over 103,000 contiguous hectares of mineral rights spanning a distance of 60 kilometers along a mineral trend in southern Chihuahua State. And that's shown here on slide number three. Over the last decade, we have discovered an entire new silver and zinc-rich mineral district, which we named the Los Gatos District. And so far, we have discovered 14 known zones of mineralization. In 2013, we formed a joint venture on the Los Gatos District with Japan-based Doha Metals Mining, whereby they provided financing to develop our initial discovery zone, Cerro Los Gatos, which now contains over 200 million silver equivalent ounces of resource. And we've been able to build that into an operating mine that began its commissioning in July of 2019. Gatos Silver currently owns 51.5% of the Los Gatos Joint Venture, and it has an option to purchase another 18.5% to bring our ownership to 70% of the district. And as you'll see in slide number four, this is one of the primary uses of proceeds from the IPO. And turning to slide four, on October 27th, we priced our IPO at $7 per share and raised gross proceeds of $172.5 million through the issuance of just over 24.6 million shares. And the next day, we began trading on the New York Stock Exchange and TSX under the ticker symbol GATO. The IPO was led by BMO Capital Markets, Goldman Sachs, and RBC Capital Markets, with Canaccord Genuity and CIBC acting as co-managers. We're very proud of the fact that to date, This is the largest precious metals IPO since 2010. It's the only NYSE and TSX dual listed precious metals IPO since 2010. And it's the largest North American precious metals equity financing in 2020. Our proceeds will substantially be used to increase Gatos Silver's ownership in the Los Gatos joint venture to 70%. and to retire our project working capital facility and to fund Los Gatos district exploration programs to continue expanding resources and reserves. And on slide five, we've provided you with a site overview. It's really a pleasure to introduce you to North America's newest silver exploration development and production company. commonly precious metals companies IPO during their expiration stage. However, Gato Silver was fortunate to have financial support from its private shareholders and Doha Metals and Mining to remain private for the last 10 years. And we've been able to methodically build value by accumulating one of the largest mineral rights packages in Mexico, then making 14 separate mineral discoveries to define a new silver and zinc-rich district, and completing a feasibility study on our initial discovery zone, Cerro Los Gatos, then securing project financing and constructing a 2,500-ton-per-day mine and processing plant that began commissioning in July of 2019. And this slide provides an aerial view of the Cerro Los Gatos project with the mine portal shown in the left quadrant of the slide. All the ore that's mined from this underground deposit is truck hauled from the mine to a run of mine or storage pad where the process plant then blends it to provide consistent quality ore to the process plant. And we create a lead concentrate that contains most of the silver and is currently being sold to Trafigura and a zinc concentrate that is sold to Doha. And on slide six, here are the expected life of mine performance metrics. The key takeaways are at 2,500 tons per day, there are 11 remaining years in the life of this mine. And it's expected to produce 12.2 million silver equivalent ounces annually, which consists of 6.5 million ounces of silver, 62 million pounds of zinc, 40 million pounds of lead, and just over 4,000 ounces of gold annually. And we expect to do this at an all-in sustaining cost of $11.77 per ounce on a silver equivalent basis. And we expect to generate $92 million of annual free cash flow over the next four years based on a silver price of just under $19 per ounce. Now, turning to our third quarter 2020 highlights, I mentioned that we began commissioning Cerro Los Gatos in July 2019. However, that was interrupted. by a Mexican government mandated suspension for COVID-19 during April and a portion of May this year. I'm pleased to report that once the suspension was lifted, we were able to rapidly resume commissioning activities during the third quarter. Accordingly, Gatosilver achieved record production from the mine, record silver, zinc, and lead recoveries through their processing plant, and it resulted in record cash flow generation. Key to this achievement was the effective COVID-19 management at the Cerro Los Gatos project. All of this position the company to take advantage of increasing investor interest in silver and silver equities to successfully complete our initial public offering. And on slide eight, this slide shows an isometric view of the mine development on the left and the daily average production rate by month on the right. So you can see that Cerro Los Gatos achieved its 2,500 tons per day target back in February of 2020 prior to the Mexican government's mandated health suspension. When the project recommissioned in June, it has been progressively increasing its production and is on target to again achieve 2,500 tons per day by January of 2021. The development is well ahead of schedule, and this has provided sufficient ore phases to sustain 2,500 tons per day. Turning to slide 9, this shows a chart of the average daily processing plant production rate by month. This processing plant is highly automated and was able to ramp up very quickly after the COVID-19 suspension. It was only constrained by the mine production and has been operating between 21 to 28 days per month. While the mine continues, its progressive production rate increased. The metal recoveries have been excellent. Silver is almost exactly the expected recovery from the feasibility study. Zinc is slightly above the feasibility study expectation, and lead is actually 2% higher. The gold content in the deposit is really quite small. At this time, I'd like to turn the discussion over to our Chief Financial Officer, Roger Johnson. Roger Johnson Thank you, Steve. I'm now on slide 10. For the quarter ending September 30, 2020, Gatto Silver Inc. had a modest $1.2 million loss. The $3.7 million of operating expenses were nearly entirely offset by a $3.4 million equity income from the Los Gatos Story Venture, its first profitable quarter since operation began in Q3 of 2010. From this slide, the pre-development costs relate to the Sunshine Complex. After October 30th, 2020, they are not part of Kato Silver Inc. operations, and they will be reclassified as continued operations beginning next quarter. In addition, the arrangement fees with DOA, which are provided by the financing, will also decrease as we move forward with repaying the working capital facility. Moving on to slide 11, the Los Gatos Joint Venture revenue in the quarter was over 50% of the revenue for the nine-month period ending September 30, 2020. Even though we operated at lower than designed throughput, higher metal prices and a focus on ore control contributed to the first profitable quarter in our relatively short life to date. Lead concentrate sales containing 90% of the recovered silver were strong. The silver in the lead concentrate is paid at a much higher percentage than silver in the zinc concentrate. Considering the COVID-19 pandemic and the lower than expected throughput, excuse me, lower than designed throughput, we're happy with the cost we had for the quarter. Back to you, Steve. Thank you, Roger. Now, turning your attention to slide 12. We devote significant attention to environmental, social, and governance factors at Cerro Los Gatos, and we view this as our social license to operate. All of our achievements at Los Gatos would not have been possible without the support of the regional government, regulatory agencies, and communities that are impacted by this project. And we recognize that it is essential to conduct our operations in a manner that protects our employees' safety, does not harm the environment, and ensures that the local communities benefit through not only employment opportunities, but also education assistance, medical care support, and provision of sustainable, clean water. Recognizing this responsibility, the Cerro Los Gatos mine was built to a world-class environmental standard. We ensure the operation is not causing air pollution through enclosure of ore storage areas that may emit dust during wind events. We constructed the tailing storage facility with a double liner to prevent water contamination. And in terms of community support, we built the first full-time medical clinic in the Ejido of San Jose del Sitio, and it is staffed by doctors from Mexico's social services. We annually fund the purchase of educational materials for local schools and provide annual scholarships for students to attend the University of Chihuahua. We funded the redevelopment of the community water system to ensure access to a sustainable source of clean water. and we constantly work to create a strong safety culture at the project. The consistent reduction in safety frequency shown on this slide tells us that it's working. Our devotion to improving the lives of those impacted by our project has been recognized by the government of Mexico, local communities, and we have never had any opposition to the project. On slide 13, Before I finish, I would like to introduce you to our management team. I have just over 40 years of experience in the resource industry with multinational resource companies for the first half of my career, and later managing junior mining companies such as Oceana Gold, Ventana Gold Corp, and now Gato Silver. Our chief financial officer, Roger Johnson, spent his early career with a big four accounting firm and then entered the resource industry by joining Rio Tinto and subsequently worked for Pesmenco Zinc and Newmont before joining Gato Silver as the chief financial officer. Our chief administrative officer, Adam Dubas, spent his early career as a financial analyst prior to joining KPMG and working in their energy industry practice. Phil Pyle, our vice president of exploration, is the co-discoverer of the Los Gatos district. And our chief operating officer, John Kenyon, has devoted most of his career to developing and managing mining operations. Our vice president of Mexico, Luis Felipe Huerta, has extensive project development experience in Latin America. So I'd like to thank you for your time today. Our full earnings report is available on our website at gatosilver.com. And at this time, Roger and I would be happy to answer any of your questions.

Thank you. At this time, if anybody has a question, please press star 1 on your telephone keypad. Again, that would be star 1 on your telephone keypad. We'll wait just a moment to compile a Q&A, Roger. And if anybody has a question, please press star 1 on your telephone keypad. First question comes from Ryan Thompson from BMO. Your line is open.