The World’s 2nd largest silver producer, Newmont mine in Mexico has been shut down. Negotiations between labor unions and Newmont management have broken down and production shut off at their Peñasquito mine late last week. The mine produced 32.4 million ounces of silver in 2022. With silver already in a widening global deficit, what will this mean for the silver price? 

The timing is far from ideal, as silver remains in a long term supply demand deficit, and new laws introduced last month in Mexico threaten to crimp supply further. 

In June of 2022, a two year collective bargaining agreement was signed by both the company and the National Union of Mine and Metal Workers of the Mexican Republic. The two parties willingly agreed on an uncapped profit sharing benefit of 10% for the workers on top of their guaranteed wages. Just a year into the agreement however, the workers aren’t happy with their 10% of the profits while bearing no risk of loss of  capital invested. The demand is now for 20% of profits from the mine to be allocated to the miners. 

Tools were downed on the 7th of June and production has ground well and truly to a halt. None of this is new for the mine operators, as Peñasquito has shut down twice since 2019. Analysts are picking the negative drag on Q2 estimates to be approximately 1.1% per week. 

Newmont (NYSE:NEM) is down 15% year to date, and down 37.5% in the past 12 months. This comes as the Gold spot price is up 8.1% YTD and only 4.6% over the last year. As we often make the point, precious metals miners have, at times, outperformed the metal itself, but it comes with significant risk as mining companies have a multitude of ways of losing money regardless of any appreciation in the spot price. That said, “Homestake”, which is now known as Barrick (NYSE:GOLD) was the best performing stock throughout the Great Depression. But in 2023 Inflation pressures, wage disputes, higher input costs, petrol costs and all of the standard issues extending from government greed, plague mining stocks.  

It’s a thankless job for mining companies, as in 2022, Peñasquito contributed US$1.9 billion in economic value to Mexico. This included US$643 million in employee wages and benefits. One wonders how many families have been fed that might have otherwise gone hungry off the back of Newmont’s investment in the mine. The mine either directly or indirectly provides for an estimated 28,000 families in the Zacatecas. It’s by far the biggest employer.

Then there are the taxes and royalty payments to federal, state and local governments, which are in turn (hopefully), contributing to the public services enjoyed by locals. As many companies in the mining sector are hectored to provide more value to communities, there have also been a range of investments in community infrastructure and water projects.

With all of this happening, if it all sounds a bit hard knowing which mines to invest in, the easier thing to do might be to just buy the physical metal for a few percent above the spot price without needing to worry about any of the mining, refining, transport, labor strikes or government red tape. And that is of course, provided that the entire mine isn’t nationalised when the spot price is finally unleashed…

Balance your wealth in an unbalanced world, with physical precious metals.