Hecla Mining Co (HL)

[Edge83]

Hecla Mining: The Levered Silver Play

Feb. 23, 2017 2:43 PM ET|5 comments| About: Hecla Mining Co. (HL)
Quad 7 Capital

Summary

HL has exploded higher over the last eight months.

Q4 earnings are out and I discuss the key metrics.

What to look for going forward.

Hecla Mining (NYSE:HL) remains one of my favorite silver miners, though the stock has exploded higher over the last eight months. I cannot blame anyone for taking profit. The only thing holding this stock back from moving to the $8-10 range is a still depressed silver price. As we know, with the recent rebound in metals, the miners have served as a levered option play on the price action. To survive the strong downturn in prices of the metals over the last few years, the miners have pulled out nearly all the stops to preserve margins, production volumes and control expenses. There's a lot of work to do on the part of miners to remain profitable and stable for the next decade plus. That said, when investing, it is about the performance. In this article, I will discuss the just announced financial performance of the company's fourth quarter.

Earnings

I have really noticed a turnaround in miners' bottom lines. Hecla is no exception and in its quarter adjusted net income for the quarter came in at $0.05 per share on a GAAP basis and $0.03 on an adjusted basis. This actually missed estimates by $0.01 but the key here is this is up 50% from a year ago. I should point out that revenues were up 42% to $164 million year over year. That tells you the kind of power that silver prices have on performance. When was the last time we saw anything like this kind of growth in sales from the company? It has been a very long time. Revenues crushed estimates by $6 million due to higher metal prices and strong production.

Cash Flow

One of the best metrics to look at to gauge the health of a miner is its cash as well as its cash flows. Operating cash was up heavily year over year and quarter over quarter to $52 million. This is up 90% year over year. This increase stems from higher production and better metals pricing. Cash and cash equivalents were $198 million at the end of the quarter. In the quarter for capital expenditures at Lucky Friday, Hecla spent $9.3 million, while at Greens Creek, it spent $11.8 million to continue mine development. At Casa Berardi, the company invested $17.5 million. Finally, at San Sebastian, the company spent $0.3 million. Last year, I was very clear that capital and exploration expenditures would be fully funded by cash from operations. This was the case this quarter. Management stated:

"We finished 2016 strongly, with record silver and silver equivalent production for the year and robust performance at all our mines driving record sales, strong net income and more than doubling adjusted EBITDA over last year. And despite using one of the most conservative price assumptions in the industry, we almost completely replaced the silver reserves that were mined, a very satisfying achievement considering our record silver production levels and lowest exploration budget since 2009. Looking to 2017, we estimate our silver equivalent production will be higher than the record we set in 2016, benefiting from higher metals prices and strong performance from our mines. We expect the grade at Greens Creek to revert towards its silver resource grade, and San Sebastian to generate strong cash flow as we extend the mine life by beginning underground mining later this year."
Price of Silver

Precious metal prices had been keeping the stock down. As soon as they turned higher, the stock took off. Average realized silver prices were up quarter over quarter but also year over year. Average realized silver price was $16.59 per ounce in the quarter. This is 16% higher than a year ago, although prices fell from Q3. With the annual change in prices, this is good news for any company operating in the sector. Higher prices are exactly what these companies desperately need. Pricing directly led to the company's strong results. Keep in mind that gold also improved. Realized prices for gold increased 10% compared to last year's second quarter, coming in at $1,202 per ounce. Further, there was volatility in the base metals. Realized prices for lead were 2% higher year over year while zinc prices were spiked 10%.

Looking ahead

My 2016 average target was $15.75 for silver, but this was trounced and came in at $17.16. I was conservative, but only moderately so. The turnaround has been strong. Now it is great that silver has rebounded, but the fact is that at this level, miners need metals to continue to rebound. Many companies are cutting costs as much as possible, which benefits margins. For this year, I see an average silver price of $18. As for a production outlook, at Green's Creek, the company sees 7.4 to 8.0 million ounces of silver and 54,000 to 60,000 ounces of gold being produced. At Lucky Friday, the company sees 3.6 to 4.1 million ounces of silver production. San Sebastian will see 3.0 to 3.4 million ounces of silver and 21,000 to 25,000 ounces of gold at costs of $1.00 per ounce of silver. Finally, Casa Berardi should see 150,000 to 165,000 ounces of gold. All-in sustaining cash costs will be $1,150 for gold and $11.50 for silver, a touch high but very respectable. Permitting will continue at Rock Creek and Montanore. With metal prices not looking to move significantly one way or the other, keep holding this name.

http://seekingalpha.com/article/4048997-hecla-mining-levered-silver-play