Hecla Mining: a Golden Bet

Hecla Mining (HL) reported its second quarter 2016 results on 4th August. The results reflect an overall improvement in the commodity prices and also in the efficiencies of the company’s operating assets.

Making a turnaround

The company’s net income applicable to common shareholders was $23.98 million, in an absolute contrast with the $26.80 million net loss of the second quarter of 2015.

There was a 64% increase in sales to $171.3 million which was the highest in the company’s history. That was well complemented by an industry-leading production growth of 71% for silver and 41% for gold due to the organic growth strategy devised by the company management.

The EBITDA was the second highest ever in Hecla’s history at $77.8 million, up 164% from the same quarter of last year. The company generated $159 million of cash, cash equivalents and returns from short term investments which was up $25 million from the preceding quarter. Operating cash flow was $67.4 million, up 119% from Q2 2015.
Hecla Mining: a Golden Bet
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Out of that, $42 million was reinvested in the company’s business in order to further enhance efficiencies and fund the organic growth opportunities.

The estimated production and production cost figures for the full year have also been improved by the company after the declaration of the results. The silver production for 2016 is now forecast to be 15.75 million ounces, up from the earlier estimate of $15.0 million ounces. An increase in production is also expected to bring the cash cost after by-product credits down from $5 per ounce to $4.75 per ounce for the full year 2016.

On the other hand, the exploration and pre-development expenditure budget has been increased by 27% to $19 million. Most of this increased budget will go toward the drilling program at San Sebastian for extending the life of the gold mine’s high grade drilling sections.

So all in all, the second quarter result was a strong one with a very strong production growth, revenue growth, operating cash flow growth as well as improved cost structure.

Strong margins leading to strong results:

Improvement was also seen in the cash margins for silver and gold. Silver operations repeated their strong margin growth of the first quarter with a 78% cash margin i.e. $13.46 per ounce in the second quarter. Silver operations at Hecla have shown a consistent margin growth over the last 3 quarters, improving 30 basis points after Q3 2015.

Similarly, Gold operations have also grown consistently in the past 6 months to June 2016. The cash margin has grown from 29% in Q4 2015 to 52% in the last reported quarter.

The advantage of increasing production volumes can be taken by any company only if its margins are fat and growing. And some of Hecla’s mines are perfect examples of highly efficient assets for any mining company. Both Greens Creek and San Sebastian mines are strong cash flow generators. While Green Creek converted 65% of its profits into free cash flow, San Sebastian beat even that with a 99 % conversion to free cash flow. And what’s more is that the latter mine has beaten its two-year free cash flow target ($ 43 million) in just six months by generating $ 48 million.

With that cash generating ability and such an efficient utilization of its assets, it is no surprise that Hecla has outperformed its peer group by 55% over the past three years on the stock market.

Precious metal prices have improved:

The silver prices in the third quarter have continued to increase. They are currently already $4 higher than the company’s second quarter average and about 20% higher than the first half average.

Similarly, gold prices have also shown a satisfactory improvement. The realized prices for gold increased 5% compared to last year's second quarter, coming in at $1,254 per ounce.

However, the recovery of silver and gold prices is not yet complete. The average prices at the moment are not as good as they were two to three years ago.

And then, the company also deals with two more metals which are not steadily recovering and showing a lot of volatility. In fact, in the last reported quarter, the average realized prices of lead and zinc were down 16% and 7% respectively.

Still, I believe for Hecla investors, only gold and silver prices matter, since gold has a 44% share and silver has a 38% share in the company’s revenue. And these two precious metals are on their way to recovery. Also, Hecla is focusing on upgrading its top cash generating mines as well as on organic growth. Considering all these factors I believe there is ample incentive to put you money on this company with the only risk that it has already come a long way up this year!

Published on Sep 7, 2016
By Vinay Singh

Copyrighted 2016. Content published with author's permission.

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