Strike freezes production at Mandalay’s Cerro Bayo mine

Mandalay Resources (TSX: MND) has suspended operations at its Cerro Bayo silver-gold mine in southern Chile, after unionized workers went on strike. 

The union initiated the strike on June 23 to improve its negotiating position in reaching a new collective agreement. Workers have also blocked access to Cerro Bayo. 

The company says it’s too early to say how long the strike will last and what its impact would be on production. 

But analysts predict the strike will likely be short-lived. 

“In most cases, these types of strikes are generally resolved within one to two weeks, with little impact on guidance,” Raymond James’ analyst Chris Thompson writes in a note. Cerro Bayo has extra mill capacity of 200 tonnes per day that could help make up for any lost production later, he adds. 

Mandalay is mining a lower-grade vein at Cerro Bayo, which will slightly increase cash costs. Desjardins analyst Michael Parkin estimates that lower output from the vein could actually lower the company-wide cash cost for 2015.  

Even if the strike were to last a month, Parkin estimates gold-equivalent production would fall by 4,000 oz. — hardly affecting his financial estimates for Mandalay. 

However, BMO analyst Andrew Kaip cautions that a longer strike could put the company’s 2015 guidance at risk. 

For the year, Mandalay forecasts saleable production of 23,000 to 27,000 oz. gold and 2.7 to 3.1 million oz. silver from Cerro Bayo. 

But it expects more gold ounces this year from its other two operations: the Bjorkdal gold mine in northern Sweden; and the Costerfield gold-antimony mine in Australia. Bjorkdal is set to produce 46,000 to 52,000 oz. gold and Costerfield should churn out 32,000 to 37,000 oz. gold, as well as 3,200 to 3,500 tonnes of antimony. 

Kaip previously expected Cerro Bayo to account for 36% of Mandalay’s estimated 2015 revenue and 38% of the total project net present value. He says each one-month delay could reduce the company’s net asset value by 0.4–0.5%.

Mandalay shares were largely unaffected by the strike action, recently trading at 96¢. 

Kaip has a $1 target and a “market perform” rating on the stock. Parkin rates Mandalay as a “top pick,” with a $1.60 target.