- We are always on the hunt for possible outsized returns.
- The recent selling in Hecla has knocked the stock off its momentum from heading to the $3.00 mark, almost knocking it down to where we would have bought again at $2.25.
- Production was below our expectations, costs were higher, and the financial results were just below par.
- The company took steps to have liquidity and issued new guidance.
- This idea was discussed in more depth with members of my private investing community, BAD BEAT Investing. Get started today »
Prepared by Stephanie, Analyst at BAD BEAT Investing
We are always on the hunt for possible outsized returns. Often, we look for beaten-down names that have been crushed for little fault of their own. At the end of March, one of the stocks we put our members in was Hecla Mining (NYSE:HL) when it was under $2 to catch the most recent rally. That call led to a solid ~50% return peak to trough in four weeks. Now the stock is starting to pull back. The recent selling in Hecla has knocked the stock off its momentum from heading to the $3.00 mark, almost down to where we would have bought again at $2.25. We believe there will be upside again, and in this column, we will specifically hone in on the most recent production numbers and financial performance in the just-reported quarter. That said, we think the company has to do better, as this quarter was rather atrocious overall, but we think the worst is passed, and we are happy to be buyers again if the stock dips sub-$2.25. Let us discuss.
Source: BAD BEAT Investing
We have to say that 2019 marked a year of higher metal production, and coming into 2020, we thought we would see continued strong cash flow generation and an improved balance sheet. While gold and silver prices have increased from a year ago, silver was down from Q4 2019. What is more, in Q1 2020, Hecla unfortunately sold a bulk of silver near the bottom in March. It has to do better. And it will. But as we will see thanks to provisional prices for a Greens Creek shipment, higher treatment charges and COVID-19-related loss of production at Casa Berardi, revenues took a bump.
There was indeed some downtime at mines. With the US, they declared that mining was a critical industry in mid-March. US mining industries' excellent record of health and safety allowed states, including Alaska, Idaho and Nevada, to be able to declare mining as essential, and that helped, though extreme precautions were taken to control who was coming into the mining areas, and efforts to keep workers safe continue. Currently, Hecla has four of its five mines operating, representing 95% of its production. Take a look at the production numbers in the first quarter of 2020 compared to the first quarter of 2019:
Source: BAD BEAT Investing
The production numbers show growth overall in Q1, though there were some areas with less production. Overall, the company put out 3.24 million ounces of silver in the quarter, an 11% increase from the 2.92 million ounces a year ago. Gold production, however, fell 2% year over year to 58,700 ounces. Given the huge increase in gold prices, and silver prices that are still above last year's levels and recovering, this will bode well for the balance sheet going forward. With multi-year highs in gold, we were hopeful production would have been better. The fiscal performance was way below expectations. Let's look a bit more closely.
We were pretty unimpressed with Hecla's financial performance, in part due to the level of production, but were really surprised at the increased costs and the low realized average selling prices. It caught us off guard and was the reason the stock got crushed after reporting. The stock rebounded because metal prices were solid today in trading, but man, it was a dud relative to expectations. In this quarter, the company saw a net loss of $17.2 million, or $0.03 per share. A year ago, losses were $25.5 million, or $0.05 per share.
Revenues were down 10.5% year over year to $136.9 million versus $152.6 million. While the strike resolution at Lucky Friday will help offset production concerns from COVID-19 relative to last year, we were looking for production of 3.4 million ounces of silver and 60,000 ounces of gold. In addition, it felt like efforts to curb costs were seemingly nonexistent this quarter, but margins were nowhere near as strong as we thought they would be.
Source: Hecla Mining Q1 earnings call slides
The overall top line result was way behind our expectations for $150 million in revenues. This stems mostly from less production and a much lower average selling price than we were looking for. The average realized silver price in the first quarter of 2020 was $14.48 per ounce, 8% lower than the $15.70 price realized in the first quarter of 2019. Realized gold prices were higher by 21%, while lead and zinc prices were lower by 16%, and 32%, respectively. The lower realized silver price relative to the average market price of $16.94 for the first quarter was the result of a large portion of silver sales occurring through concentrate shipments in March, when the price hit a quarterly low. Ouch! Further, costs were mixed. Cash costs for silver were up 155%, though they were down for 17% for gold. All-in sustaining costs were up 18% for silver but down 26% for gold.
Operating cash flow of $4.9 million decreased 75% compared to the first quarter of 2019, primarily due to the higher ramp-up and suspension costs and interest expense. Balance sheet-wise, we think Hecla is fine. It started the year with $62 million of cash and no revolver balance outstanding. At the end of the quarter, it had $5 million of net cash balance. The company used $31 million to reduce leverage as it repaid $506 million of the outstanding bonds with that and issued a new $475 million bond. Now, some may see new debt as a red flag. Think again. Hecla drew $210 million down on the revolver during the quarter to increase its cash position at quarter-end to $250 million. In these circumstances the world finds itself in currently, liquidity is a must and drawing under the revolver is simply acting to mitigate risk.
Operationally, Hecla is focusing its efforts on several properties along with having a solid cash position and ensuring liquidity. Unlike many companies, Hecla did issue some guidance. For the year, it reduced silver guidance from 11.1-12.1 million ounces of silver to 10.9-11.9 to reflect downtime from COVID. For gold, more of the same, the company sees 195,000-208,000 ounces of gold being produced, down from 212,000 on the low end originally. Hecla also sees commensurate declines in base metal production. The good news is, the company's cash costs at each mine will be in line with initial guidance with only some changes, but the biggest takeaway is a larger all-in sustaining cash cost for silver, now estimated to be about 10% higher, while gold costs will remain the same.
This was a terrible quarter, but the worst is now past, as mines are operating. We have annual guidance that shows slightly less production, and slightly higher costs. That might put a cap on shares, but we still see sizable upside from the $2.25 level, which is where we would want to be buyers again. Sale prices for the metals will be strong going forward, with extremely high gold prices and silver prices on the mend. As economic activity ramps up, base metal prices should rise as well. All told, we think you want to scoop shares for the next run higher.
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This article was written by
Quad 7 Capital is a team of 12 with a wide range of experience sharing investment opportunities for nearly 7 years. Quad 7 Capital as a whole has expertise in business, policy, economics, mathematics, game theory, and the sciences. They share both long and short trades and invest personally in the stocks they discuss within their investing group. They lead the investing group Bad Beat Investing include: daily market commentary and market briefing, 1-2 trade ideas per week, 5 chat rooms for a range of sectors, volatility screeners, unusual options activity alerts, and economic calendars. Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in HL over 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. Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in HL over 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.