Hecla Mining Co (HL)

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More Upside Ahead For Hecla Mining

Oct. 8, 2015 1:31 PM ET | 1 comment | About: Hecla Mining Co. (HL)

Summary

•Driven by the resurgence in gold and silver pricing, Hecla Mining shares have shot up more than 20% in the past month, but investors can expect more upside.

•The probability of a rate hike by the Fed in October is just 7%, while the odds for December have dropped from 44% to 36%, indicating that prices will improve.

•Hecla’s Casa Berardi mine will benefit from gold price improvements as its cash margins have increased tremendously despite lower pricing, driven by the addition of higher grade zones.

•The deficit in the silver market will be another tailwind for Hecla as the company’s Greens Creek silver asset is producing more ore at lower costs.

•More importantly, increase in the industrial usage of silver will increase demand for the commodity, and ultimately increase prices further and create a tailwind for Hecla.



Ever since the Federal Reserve announced in September that it won't be hiking interest rates due to macroeconomic uncertainty, Hecla Mining (NYSE:HL) has surged nicely on the stock market. Though Hecla shares are down 16% this year, they have recovered almost 20% in the past month. This is despite weak second-quarter results posted by the company in August.

Looking ahead, there are indications that the price of commodities such as gold and silver will continue improving, and this will be a catalyst for Hecla as it has been boosted by the recent rally in commodity prices. Now, there is a good chance that the Federal Reserve will continue delaying the interest rate hike.

In fact, the probability that the Fed will hike interest rates in the Oct. 27-28 policy meeting is just 7%. In addition, the odds of a rate hike for December have also declined to 36% from 44%. Gold prices and interest rates are inversely related, as higher interest rates make instruments such as treasuries more desirable from an investment viewpoint since gold does not offer any interest yield. The following chart clearly indicates the relationship between gold prices and interest rates:



As shown above, gold prices have increased consistently since the interest rate started dropping in 2008, and since the Fed has delayed the hike, it is likely that gold prices will continue rising. At the same time, gold buying has also increased lately. According to the World Gold Council, in July, central banks across the globe bought 62 tons of gold. This was followed by the addition of 47 tons in August. These developments indicate a positive scenario for gold prices going forward, which is good news for Hecla Mining.

More importantly, Hecla is well-positioned to benefit from the increase in gold prices due to its asset optimization moves.

Casa Berardi will drive growth

Hecla has increased its gold exposure with the Casa Berardi mine. It has recently discovered areas at this mine that can positively impact this year's gold production in the 123 Zone. It is drilling this deposit with multiple 1-ounce intercepts, which is good news since Casa Berardi has 2P reserves of 1.3 million ounces of gold at grades of 0.14 ounce per ton and M&I resources of 1.4 million ounces at grades of 0.12 ounce per ton.

As a result of the high-grade profile nature of this mine, Hecla has achieved a substantial decrease in cash costs at this mine, both on a sequential and a year-over-year basis.

Source: Investor presentation

The decrease in cash costs at Casa Berardi has helped Hecla improve its cash margins despite a decline in gold prices. As seen above, Hecla's cash margin stood at 30% last quarter, up from just 20% in the preceding quarter and 26% in the prior-year period. Now, as the company is looking to gain access to more number of high grade zones at this mine, it should be able to improve its cash margins further, while the recent uptick in gold prices will be another tailwind.

Silver will be another tailwind

Hecla will also benefit from improving conditions in the silver market. In fact, silver now trades near three-month highs as demand for the metal will outstrip supply going forward. For instance, the Silver Institute is of the opinion that the silver market will see a deficit of 57.7 million ounces in 2015 as physical demand rises.

The increase in physical silver demand will be primarily driven by industrial applications such as solar panels. In the first six months of this year, the solar industry has been estimated to consume 65 million ounces of silver, up 8% from last year. Going forward, the usage of silver in the solar industry will continue rising as more solar panels are installed globally.

In fact, this year, solar installations across the globe are expected to increase between 25% and 30%, and the trend will continue in the long run as the move toward renewable sources of energy increases. This means that the recent run in silver prices will continue going forward as demand for the metal is strong, while the market is in deficit.

This is another tailwind for Hecla Mining as the company has made impressive moves to strengthen its silver production at lower costs.

Hecla will benefit from low-cost silver production

Hecla Mining has strong silver assets with high quality grades. For example, its Greens Creek silver asset produced 10% more silver at cash costs, after by product credits, of $3.30 per ounce in the second quarter 2015. This is way lower than the current silver price of around $15.70 per ounce.

The low costs at this mine can be attributed to higher recoveries and grade. In fact, Hecla's silver recoveries had increased 8%, or 5 percentage points, to 75% year-over-year in the previous quarter at this asset. The improvement in silver recovery was driven by changes made to the floatation circuit, which helped Hecla capture additional lead concentrate and convert it to the final concentrate more effectively.

Hence, Hecla will be able to mine more silver at this asset with lower costs, which will assist the company in addressing the deficit in the end market more efficiently.

Conclusion

The prospects of both the gold and the silver market are improving. This is good news for Hecla investors as the company looks well-placed to capitalize on the opportunity in the end market by way of its robust assets. Thus, in light of the points presented above, I think that Hecla will be able to sustain its recent run going forward, which is why it makes sense to remain invested in the stock.