Fresnillo cuts production targets on Omicron labour shortage

Shares in Fresnillo (LSE: FRES) fell more than 14% after the Mexico-focused miner cut silver production forecast for 2022, saying that labour absences fuelled by the Omicron variant were expected to have a greater impact in the earlier part of the year than anticipated.

The precious metals producer, which operates seven mines in Mexico, now expects to churn out between 50.5 million and 56.5 million ounces of silver this year.

Attributable gold production for 2022 is also expected to decrease, staying in the range of 600,000 to 650,000 ounces, driven mainly by the Noche Buena mine coming to the end of its productive life.

The new guidance was provided alongside an update on 2021 production, with silver output falling “marginally short” of forecast figures, but gold production topping expectations.

Silver output in 2021 reached 53.1 ounces of silver, slightly below the 53.5 to 59.5 million ounces of silver (including Silverstream) previously anticipated, but flat when compared to 2020.

Attributable gold production for the full year came in ahead of expectations, but was still down 2.4% year-on-year at 751,200 ounces. Fresnillo said this was due to lower ore grade at Cienega, and lower grade and volume processed at the San Julian Veins. This was offset by a higher volume and grade at Noche Buena.

The company faced operational challenges last year at the Herradura mine, with increased silt restricting the plant’s filter capacity, Fresnillo said. Production in this period was down 30% year-on-year at 150,300 ounces, which was also a 13% drop from the previous quarter.

The main obstacle, however, has been the lack of qualified workers, the company said.

“As reported in the third quarter of 2021, the labour reform in Mexico restricting the ability to subcontract labour came into effect from September 1, resulting in the requirement to internalize a high proportion of our contractor workforce,” Fresnillo said.

“This in turn has affected equipment availability (equipment previously provided by contractors and maintenance work previously carried out by contractors) and utilization rates (turnover and vacancies),” it added.

Looking ahead, chief executive officer Octavio Alvídrez said the company’s priorities were. “We must continue to navigate the challenges presented by both Covid-19, which regrettably is again accelerating in Mexico … as well as continue to adapt to the new labour reform,” he said. “The safety of our people is our priority, as is ensuring we continue to roll-out our performance improvement measures across our portfolio.”

Fresnillo said it has taken action to address these issues, including recruitment campaigns, training and investment in new equipment, which would continue.

On January 26, shares in the company closed at 687.8 pence ($11.71) in London. Fresnillo’s market capitalization sits at £5.92 billion (about $10 billion).