What happened
Shares of precious-metals miner Gatos Silver (GATO -0.21%) plunged at the open of trading on Wednesday, losing nearly two-thirds of their value in a matter of minutes. The news that precipitated this painful decline was released after the close on Jan. 25, and clearly, it was pretty shocking to investors.
So what
Gatos Silver basically discovered what it called "errors" in a technical report related to its Los Gatos Project in Mexico. These errors may reduce an important mineral-reserves estimate at the mine by somewhere between 30% and 50%. The miner stated, "At this time, the Company cannot accurately quantify the exact magnitude of the reduction, and the mineral resource and reserve estimates in the 2020 Technical Report should not be relied upon."
This is a huge issue at the company's main asset and brings into question the long-term value of the Los Gatos Project. It's little wonder that investors reacted so negatively and so quickly. And, not surprisingly, there were analyst downgrades as well.
Image source: Getty Images.
To the company's credit, it did highlight that this update was a part of the news release, even though you had to read the news story to see just how troubling the update was. Often companies try to hide bad news under good news.
That said, it was paired with performance guidance for the rest of fiscal 2022. Essentially, Gatos Silver expects record production, including a 15% increase in silver production. While that's nice, investors generally value a miner by both what it produces and what it has left in the ground for the future. So the currently large (but undefined) reduction in the reserves at the Los Gatos project are heavily, and probably justifiably, outweighing the positive production news.
Now what
The shares of silver miners are particularly volatile given the often volatile nature of silver. That's even more true when the companies are small, like Gatos Silver; after today's massive early stock loss, it had a $250 million market cap.
But this is not a normal price gyration by any stretch of the imagination. Given the uncertainty around what the revision will be (the difference between 30% and 50% is huge), most investors will probably be better off elsewhere until the miner has a better handle on the scope of this issue.
