Hecla: The Only Thing To Focus On
May 17, 2017 12:06 PM ET
Quad 7 Capital
Summary
•HL has had a nice run up but metal pricing still drives the action.
•Q1 earnings are out and I discuss the results.
•A strike could impact production.
Hecla Mining (NYSE:HL) remains one of my favorite silver miners, though the stock has exploded higher over the last eight months. Still it is a levered play on silver. AS silver moves higher, this name moves at an even greater clip. Of course, the reverse is true as well when silver is under pressure. Now after the run up, I cannot blame anyone for taking profit. But the risk is to the upside. The market is nervous. We have had choppy action. The only thing holding this stock back from moving to the $8-10 range is a still depressed silver price. But with the right pressures investors seek safe havens in gold and silver, and that pushes miners higher quite often. 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, and Hecla just reported Q1 results.
Earnings
I will say there has been a noticeable turnaround in miners' bottom lines. Hecla is no exception and in its quarter adjusted net income came in at $0.07 per share on a GAAP basis and $0.04 on an adjusted basis. This actually beat estimates by $0.01 but the key here is that net income was up $27.5 million over last year. I should point out that revenues were up 9% to $143 million year-over-year. That tells you the kind of power that silver prices have on performance, because silver production was lower. Revenues however were expected to be much higher, and fell short of estimates by $26 million.
Cash Flow
Now I have said this before but I must reiterate that 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 to $38.3 million. This is up 104% year over year. This increase stems from better metals pricing and timing of sales at several mines. Cash and cash equivalents were $213 million at the end of the quarter. In the quarter for capital expenditures at Lucky Friday, Hecla spent $4.0 million, while at Greens Creek, it spent $5.2 million. At Casa Berardi, the company invested $12.4 million. Finally, at San Sebastian, the company spent $1.7 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. However, an ongoing strike will pressure the company. Management stated:
"We have started 2017 with strong sales, net income and free cash flow, and our silver margins remain among the top in the industry, driving an increase in cash balances and strengthening our balance sheet. While the increase of cost of sales over last year reflected the higher throughput from the Casa Berardi open pit operations, our cash cost, after by-product credits, declined 73% to $0.84 per silver ounce and our AISC, after by-product credits, declined 24% to $7.60 per silver ounce. For the remainder of 2017, our focus is on growing reserves and resources, investing in new technologies that will increase productivity, mine life and margins, and advancing the underground at San Sebastian as well as optimizing the open pits at Casa Berardi. In addition, we are focused on working to end the strike at Lucky Friday. In the meantime, we are suspending our Lucky Friday and Company-wide estimates for silver production and cost, until it is resolved."
Price of Silver
While there is some cause for concern in that commentary, precious metal prices will drive most of the action. 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 $17.90 per ounce in the quarter. This is 20% higher than a year ago, and up from Q4 2016's $16.59. 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. Gold also improved. Realized prices for gold increased 3% compared to last year's quarter. Realized prices for lead were 36% higher year-over-year while zinc prices were spiked 59%.
Looking ahead
For this year, I see an average silver price of $18. While the strike at Luck Friday is an issue, the key to watch is silver prices, and the impact to production from this strike. With metal prices not looking to move significantly one way or the other, keep holding this name.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
