Hecla Mining: This Is Another Opportunity

| About: Hecla Mining (HL)
This article is now exclusive for PRO subscribers.


Hecla Mining’s silver business is growing at a fast pace due to a rapid increase in production and a decline in costs.

Hecla has ramped up its silver production forecast for the year to 15.75 million ounces and also lowered its cash cost forecast to $4.75/ounce, which will enhance its margins.

Hecla’s silver operating margin for 2016 will be $12.25/ounce at least, representing an increase of 26% from last year.

Hecla could generate higher silver margins than forecasted as the full-year average silver price could rise to $18.00/ounce as compared to the current average of $17.00/ounce.

Last month in an article on Hecla Mining (NYSE:HL), I had explained how the strength in gold prices and Hecla's strong gold assets will allow it to deliver margin growth going forward. Considering that gold made up for 44% of Hecla's revenue last quarter, it was important to explain the economics of Hecla's gold mining business.

But, at the same time, I think that investors should not forget that Hecla's silver business also accounts for a sizable chunk of the revenue at 38%. Hence, it will not be wise for investors to ignore the prospects of this segment either. So, in this article, we will take a closer look at the prospects of Hecla Mining's silver business and see if this segment is also going to deliver strong growth in the long run.

The silver business is growing rapidly

Looking ahead, it won't be surprising if the silver business of Hecla Mining actually overtakes the gold segment. I'm saying this because the company's silver production is the previous quarter shot up an impressive 71% year-over-year, while gold production had increased at a relatively slower pace of 41%.

In all, Hecla Mining had produced 4.2 million ounces of silver last quarter, and encouraged by the strong growth in the output, the company has bumped up its annual forecast. In fact, for the entire year, Hecla Mining now expects to produce 15.75 million ounces of silver as against its prior expectation of 15 million ounces.

More importantly, this increase in the production outlook comes along with a drop in the cost outlook as well. Now, Hecla believes that it will be able to produce silver at a cash cost of $4.75 per ounce as compared to the prior forecast of $5.00 per ounce. If Hecla is actually able to achieve these targets, the company will be able to achieve strong margin growth this year. Let's see how.

Stronger silver margins in the cards

In the first half of the year, Hecla Mining has produced a total of 8.8 million ounces of silver. Thus, considering the company's projections for the entire year, it will be producing another 7 million ounces in the second half of 2016. In comparison, last year, Hecla's production in the second half of the year had stood at around 6.3 million ounces. More importantly, this production will come in at a lower cost base as compared to last year.

Last year, Hecla's cash cost per ounce of silver, after by-product credits, had stood at $5.85/ounce. Therefore, this year, the company is on track to achieve a reduction of almost 19% in its costs this year. At the same time, Hecla is enjoying superior silver prices of late. Last quarter, its realized price per ounce of silver stood at $17.26 an ounce, up 5.7% from last year.

This means that Hecla's silver mining margins have actually increased this year due to better pricing and lower costs. As mentioned earlier, for entire 2015, Hecla's silver cost per ounce stood at $5.85 per ounce, while the company's average realized silver price was $15.57 per ounce. Thus, Hecla's operating margin on each ounce of silver was $9.72.

Now, this year, Hecla forecasts that its silver mining cost will come in at $4.75 per ounce. Now, so far this year, the price of silver has averaged $17.00 an ounce. If the current silver pricing environment continues, which is highly likely, Hecla's silver operating margin for 2016 will be $12.25 an ounce, which represents an increase of 26% from last year.

If we throw the higher silver production that is expected this year into the mix, Hecla's overall profitability will receive a huge boost. More importantly, I won't be surprised if Hecla's operating margins on each silver ounce are actually higher than what I have projected above.

This is because the price of silver is expected to pick up more momentum in the remaining months of the year. In fact, according to HSBC, the silver price could hit $21.50 an ounce by the end of the year, taking the full-year average price to $18.00 an ounce. What's more, the trend of higher silver prices is expected to continue next year as well, with HSBC forecasting a price of $19.25 an ounce.


Thus, a combination of higher prices and lower costs will continue to act as tailwinds for Hecla Mining's silver business going forward. Hence, along with the strength in gold, the robustness of the silver segment is another reason why investors should continue to hold Hecla Mining despite gains of 190% this year.

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.