Why Hecla Mining Can Make A Comeback

| About: Hecla Mining (HL)

Summary

Hecla Mining shares have taken a beating over the last couple of months, but investors can use this drop to buy more shares given the company’s potential.

A combination of higher gold and silver pricing, along with lower costs in the third quarter will allow Hecla to post rapid growth in its financials.

In fact, Hecla will be able to post a profit in the third quarter as compared to a loss in the prior-year period, which is a positive sign for investors.

Hecla could lower costs further as the company is drilling deeper into the high-grade zones at its mines, which will allow it to reduce costs and enhance production.

Though Hecla Mining (NYSE:HL) shares have done really well on the market this year, there has been a pullback of late. In fact, over the past two months, Hecla shares have lost around 12% of their market capitalization. This massive drop in Hecla's share price is despite the fact that the company reported really strong results the last time. However, the weakness in gold and silver prices has weighed on Hecla's shares.

But, in my opinion, this could be an opportunity to buy more shares as a recovery in gold and silver pricing will lead to a strong earnings performance. Let's see why.

Hecla's strong financial performance will continue

In the last reported quarter, Hecla's revenue had increased over 64% on a year-over-year basis, while it posted a profit of $24 million as against a loss of $26.6 million in the year-ago period. Looking ahead, it is likely that Hecla will be able to sustain its robust financial performance as the company is increasing its production, while superior gold and silver prices as compared to the prior-year period will drive margins.

For instance, for the recently-concluded third quarter, analysts anticipate that Hecla's revenue will grow close to 53%, while the company will post a profit of $0.06 per share as compared to a loss of $0.05 per share last year. This rapid improvement in Hecla's performance will be a result of improved production and an uptick in average realized prices.

In fact, during the first six months of the year, Hecla's gold and silver production increased by 39% and 66%, respectively, from the year-ago period. At the same time, its cash costs declined rapidly. More specifically, Hecla's cash cost of each gold ounce was $676 in the first half of the year, down from $896 an ounce in the prior-year period, which is a drop of almost 25%. Similarly, silver costs were down around 34% on a year-over-year basis to $3.46 an ounce.

Even if Hecla is able to maintain its current cost levels, the company should see a rapid improvement in its financial performance in the third quarter. This is because Hecla will witness substantial growth in realized prices during the third quarter. In the third quarter of last year, Hecla's average realized price per ounce of gold and silver was $1,121 and $14.54, respectively.

Now, in the third quarter of the current year, gold prices have traded at an average of $1,335 an ounce, while silver prices have average $19.61 an ounce. This represents an increase of 19% and 35%, respectively, from the year-ago periods. Thus, a combination of a substantial increase in prices and a lower cost base will be tailwinds for Hecla Mining in the third quarter.

More importantly, it won't be surprising if Hecla is actually able to lower its cost base further and beat the bottom line estimate by a wide margin. Let's see why.

Why Hecla's costs could decline further

It won't be surprising if Hecla Mining is able to lower its cost base further since the company is focused on adding more high-grade production to its portfolio. For instance, at San Sebastian, Hecla management is of the opinion that the company will clock an internal rate of return of 400% since its cash cost of producing silver will come in at just $1.00 an ounce.

In order to take advantage of this low cost profile, Hecla has decided to drill deeper at San Sebastian. For instance, Hecla has decided to drill into the extensions of the Middle and Francine veins at San Sebastian with some success. In fact, the company has witnessed grades of 288.6 ounce per ton of silver and 1.54 ounce per ton of gold in this area.

As a result of such moves, Hecla has managed to improve its mine life of the East Mine Crown Pillar at Casa Berardi by 5.5 years, while reducing the cost structure at the same time. Due to lower costs and a higher mine life, the EMCP pit is estimated to carry an internal rate of return of 90%.

Now, an increase in grades leads to a drop in the cost profile since miners find it easier to access the gold ore, which reduces operating costs at a mine due to lower waste stripping. In more simple terms, extracting gold or silver out of a high-grade mine requires less effort, which is why input costs are low. This is the reason why Hecla is focused on drilling deeper into areas with higher grades, since this will allow the company to gradually lower its cost profile further going forward and enhance margins.

Impact of higher pricing and low costs on financials

Earlier this week, Hecla pre-released its production numbers for the third quarter. The company produced 4.31 million ounces of silver, an increase of 67% from last year on the back of higher grades. At the same time, the company's gold production increased 20% year-over-year to 52,126 ounces.

Now, assuming an average realized price of $19.61 per ounce of silver in the third quarter, Hecla's revenue from this segment will come in at $84.5 million. In comparison, last year, the company's silver production was 2.6 million ounces, while the average realized price was $14.54 an ounce, leading to revenue of $37.8 million from silver operations.

Thus, on a year-over-year basis, Hecla's silver revenue will increase by more than 120%. Meanwhile, Hecla's gold revenue will come in at almost $70 million, up from around $49 million last year, representing an increase of close to 43%. Thus, higher production and pricing will allow Hecla to report revenue of $155 million from its gold and silver segments, up from only $87 million last year.

This increase in revenue will also be accompanied by lower costs. In the year-ago quarter, Hecla's cash cost per silver ounce was $7.52, which means that its cash margin per ounce was $8.02 an ounce. This indicates that Hecla's overall cash margins from silver were less than $21 million. In the third quarter of the current year, Hecla's silver margin could increase to $16.15 an ounce if the company is able to sustain its cost performance.

This will lead to overall silver cash margins of almost $70 million, which is more than triple the amount it recorded last year. Additionally, the company's gold cash margin on each ounce could double to $659 an ounce from $328 an ounce in the year-ago period, assuming the cash costs seen in the first half of the year are constant.

More specifically, Hecla's gold cash margins in the third quarter will come in at $34 million, up from $14 million last year. Hence, Hecla's total gold and silver cash margins in the third quarter will be $104 million as compared to $35 million in the year-ago period. Hence, it is not surprising to see why the company is expected to post a profit of $0.06 per share in the third quarter of 2016 as compared to a loss of $0.05 per share in the year-ago period.

Thus, Hecla will triple its margins on account of higher pricing, better production, and lower costs. As a result, when the company releases its results on November 4, it will be able to deliver a huge beat on the top and bottom lines, which will allow it to arrest the slide in its stock price.

Conclusion

Hecla Mining might have had a bad time on the market in the past couple of months, but investors should not forget that the company is quite capable of making a comeback going forward in light of the points discussed above. So, it will be a good idea to stay long Hecla Mining and instead buy more shares to take advantage of the recent weakness in the stock price since the company will be able to make a comeback after its upcoming results.

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.