Hecla Mining: Caution, Not Exuberance, Should Be Our Trading Rule

Summary

• Revenues were $188.89 million in 4Q 2020, down 16% from a year ago and down 5.4% sequentially.
• Lucky Friday returned to full production levels in the fourth quarter of 2020.
• The recent silver rally makes me very cautious here.
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Source: Hecla Mining Presentation

Investment Thesis

Idaho-based Hecla Mining (NYSE: NYSE:HL) can be considered a "silver" stock, and, in fact, the company produces about one third of all silver produced in the US.

However, gold production is still the miner's primary component now, with 49,014K Au Oz this quarter.

The company released its fourth quarter 2020 results on Feb. 18, 2021. The results matched analysts' expectations.

One positive development that has deeply influenced Hecla Mining is the recent rally in the silver price, which contrasts quite radically with the bearish trend that gold price suffered until last week.

We can see that HL still outperforms the VanEck Vectors Gold Miners ETF (NYSEARCA: GDX) and the iShares Silver Trust (NYSEARCA:SLV) on a one-year basis. HL is up 113% now.

Data by YCharts

The investment thesis is difficult to formulate with certainty. I'm tempted to consider HL as a decent long-term investment looking at the balance sheet. The recent silver rally made me very cautious in this category because of the rally's suspect nature that I consider more like manipulation than anything fundamentally sustainable.

Hence, I believe it's not good to hold a large long-term HL position but a small speculative one until this enthusiasm quiets down. Conversely, HL could be considered as the perfect trading vehicle due to this unusual volatility.

CEO Philippe Baker said in the conference call:

You all recognize the challenges of operating mines in pandemic. Our fast response, and our industry being considered essential in the U.S., allowed us to produce significantly more silver than we guided at the beginning of the year, so 1.4 million more ounces we produced than what we had guided.

Company Balance Sheet And Production In 4Q 2020 - The Raw Numbers

Hecla Mining	4Q '19	1Q '20	2Q '20	3Q'20	4Q'20
Sale Revenue and others in $ million	224.95	136.93	166.36	199.70	188.89
Net Income in $ million	-8.11	-17.32	-14.03	13.49	0.80
EBITDA $ million	64.04	39.69	40.98	68.77	47.50
EPS diluted in $/share	-0.02	-0.03	-0.03	0.03	0.00
Cash from operating activities in $ million	57.26	4.93	37.53	73.49	64.90
Capital Expenditure in $ million	24.1	19.9	10.82	23.69	36.63
Free Cash Flow In $ million	33.17	-14.94	26.71	49.80	28.27
Total cash $ million	62.45	215.52	75.92	98.67	129.83
LT Debt in $ million	504.73	679.02	518.85	509.90	507.24
Dividend per share in $	0.0025	0.0025	0.0025	0.00875	0.00875
Shares outstanding (diluted) in a million	502.90	523.22	525.24	535.79	531.02
Silver and Gold Production	4Q '19	1Q '20	2Q '20	3Q'20	4Q'20
Silver Production K Au Oz	3,412	3,245	3,404	3,541	3,352
Gold production K Ag Oz	74.8	58.8	60.0	41.2	49.01
Silver realized $/oz	17.47	14.48	16.33	25.32	25.16
Gold price realized $/oz	1,488	1,588	1,736	1,929	1,873
AISC by-product	11.31	12.45	9.33	11.53	15.35

Click to enlarge

Data Source: Company material

Analysis: Silver And Gold Production Details For The Fourth Quarter Of 2020

1 - Total Silver/Gold production

Its 2020 silver production was 13.5 million ounces, up 7%, and gold production was 208,962 ounces, down 23% from 2019.

For the fourth quarter, gold production was 49,014 oz, and silver production was 3,352,336 Oz. One milestone is that Lucky Friday Mine returned to full production levels in the fourth quarter of 2020.

For the Nevada Operations, all ore mined was stockpiled, with no ore milled and no production reported during the second half of 2020.

At Casa Berardi in Quebec, the fourth quarter production increased 8% over the prior-year period due to more tons milled and higher grades. The mill operated at an average of 4,129 tpd in the fourth quarter of 2020.

Metal price in 4Q '20	Price $
Gold per ounce	1,873
Silver per ounce	25.16
Lead per Lb	0.90
Zinc per Lb	1.27

Click to enlarge

2 - Silver price is $25.16 in Q4, and AISC by-product is $15.35/Ag Oz

AISC (Ag) has climbed significantly this quarter, as we can see in the chart below.

The silver price was up 44% compared to the same quarter a year ago, and AISC (by-product) went up from $11.31 last year to $15.35 this quarter. AISC gold was $1,330 per ounce.

2021-2023 Outlook

It is the first time that the company indicates multi-year guidance. The company expects CapEx for 2021, at around $110 million and $30 million for exploration.

2021 Production Outlook	Silver Production(Moz)	Gold Production(Koz)	Silver Equivalent(Moz)	Gold Equivalent(Koz)
Greens Creek	9.5 - 10.2	40 - 43	20.5 - 21.5	227 - 237
Lucky Friday	3.4 - 3.8	N/A	6.2 – 6.4	67 - 70
Casa Berardi	N/A	125 - 128	11.5 - 11.7	125 - 128
Nevada Operations	N/A	20 - 22	1.8 - 2.0	20 - 22
2021 Total	12.9 - 14.0	185 - 193	40.0 - 41.6	439 – 457
2022 Total	13.7 - 14.5	173 - 181	41.0 - 42.5	448 – 465
2023 Total	14.2 - 15.0	177 - 186	42.5 - 44.5	467 - 485

Click to enlarge

Source: Press release.

Financial Snapshot

1 - Total Revenues were $188.89 million in 4Q '20.

The revenues were $188.89 million in 4Q '20, down 16% from a year ago and down 5.4% sequentially.

Hecla Mining reported a fourth-quarter income of $0.8 million, or 0.00 per share, compared to a loss of $7.98 million in the same period a year earlier, or $0.02 per share.

The adjusted net income applicable to common shareholders was $13.0 million, $0.02 per share, and the adjusted EBITDA of $55.8 million. I was not particularly impressed with those results.

2 - Free Cash Flow was $28.3 million in 4Q '20.

Note: The generic free cash flow is the cash from operating activities minus CapEx.

2020 Free cash flow is $89.9 million, with a free cash flow of $28.3 million this quarter. The rise in free cash flow pushed the company to increase the dividend by 50% last quarter.

On February 16, 2021, the board of Directors declared a quarterly cash dividend of $0.00875 per share of common stock, consisting of $0.00375 per share for the minimum dividend component and $0.005 per share for the silver-linked dividend component. The common dividend payable on or about March 19, 2021, to stockholders of record on March 8, 2021. The realized silver price was $25.16 in the fourth quarter satisfying the criterion for the silver-linked dividend component of the Company's dividend policy.

3 - The net debt is $377.4 million in 4Q '20.

The company indicated $129.83 million in total cash. Net debt is now $377.4 million. It's a net debt reduction of approximately $81 million, or 17%, from March 31, 2020. CFO Lindsay Hall said in the conference call:

Our adjusted EBITDA of $224 million reduced our net leverage ratio to 1.8, beating our target of less than two, while providing a liquidity position of $380 million.

4 - Proven and Probable reserve 2020.

The company indicated that Proven and Probable silver and gold reserves sank 11% for the year to 188 million ounces of silver and 2.4 million ounces of gold.

Source: Presentation

Lead and zinc reserves decreased 9% and 12% to 740 thousand tons of lead and 886 thousand tons of zinc.

Conclusion and Technical Analysis

Hecla Mining has indicated multi-year guidance for the first time, and I believe it is a very encouraging move. It shows confidence and reliability about its productive assets and a good handle of the ore body in general.

With silver price trading at a record-high, Hecla Mining will strengthen its balance sheet and spend more on CapEx.

However, the exuberance around silver is not something that I consider welcome. It makes me extremely cautious when I see sky-high projections that are not based on solid logic.

Hecla Mining is benefiting from the exuberance right now but could also tumble quickly when the excitement is gone. The same story for Coeur Mining (NYSE:CDE) and Pan American Silver (NASDAQ:PAAS) we saw jumping artificially a while ago.

However, when I look at the company's fundamentals, I see a solid core that makes me confident, and it is the bottom line.

Technical Analysis (Short Term)

HL forms an ascending channel pattern with resistance at $7.30 - $7.60 and support around $5.40. The ascending channel, in this case, could be considered bearish because the pattern has been entered from the resistance, but it is not clear.

However, I believe a short-term strategy should be to accumulate between $6.10 and $5.40 and take profits off above $7.25.

HL is highly correlated to silver and gold prices. Therefore, you must trade the stock while keeping a hawk-eye on these commodities.

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Analyst’s 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.

I trade HL short term occasionally.