SIL - Hecla Mining: A Silver Lining In A Tough Industry

2023-03-29 13:12:08 ET

Summary

• Hecla Mining Company had a successful year in terms of production results.
• The company has added 50 million ounces of silver to its reserves through its acquisition of Alexco Resource and its Keno Hill project.
• Hecla also acquired an explorer next to Keno Hill that gives it optionality.
• Is Hecla a buy here, or should investors look elsewhere?

Hecla Mining Company ( HL ), the biggest silver miner ( SIL ) in the U.S. with over 240 million ounces of silver reserves, has recently reported its Q4 2022 financial results and updated its 2023-25 guidance. Although the company is experiencing inflationary pressures, it has fared better than most gold and silver miners, as evidenced by its strong financial performance.

In addition, Hecla's recent acquisition of Alexco Resource for its Keno Hill project has added over 50 million ounces of silver to its reserves and adds to Hecla's excellent portfolio of development and exploration properties. And its takeover of ATAC Resources adds more optionality in this region, too.

Although Hecla's shares have taken a hit in the short term, dropping 12% over the past year, I believe that the future is bright for this leading silver producer, especially as gold & silver prices start to take off.

Hecla's 2022 Results: What Happened?

Hecla Mining had a successful year in terms of production results, producing 14.2 million ounces of silver and 175,807 ounces of gold, and adding 49,000 tons of lead and 65,000 tons of zinc in by-product credits.

Despite challenging market conditions, the company was able to achieve its silver cost guidance, with an all-in sustaining cost after by-product credits of $11.25 per silver ounce.

In Q4, Hecla had sales of $194.8 million, with a cost of sales of $169.8 million, resulting in a gross profit of $25 million. For the full-year 2022, sales amounted to $718 million, with a cost of sales of $602.7 million and gross profit of $116 million. Hecla's adjusted EBITDA for 2022 was $217.5 million, and it finished the year with Q4 EBITDA of $62.2 million.

But, despite these positive results, Hecla produced a negative free cash flow of -$59.4 million in 2022, blamed on lower revenues, higher production costs, and higher capital spend at Lucky Friday and Greens Creek.

However, readers should note that the company also acquired Alexco Resource in a deal that was finalized in September, at a cost of $69 million. Its silver streaming interest at Alexco's Keno Hill property, held by Wheaton Precious Metals ( WPM ), was also terminated in exchange for $135 million of Hecla common stock.

These were expensive, but aggressive moves to grow the company; Hecla appears to be taking advantage of the weak market conditions to add to its reserves and production at a pretty low cost.

Even with these moves, Hecla was able to end the year in relatively strong financial shape, with $105 million cash in the bank, $245 million available liquidity, and manageable debt of $517 million.

A Look At Hecla's 2023 Guidance And Its Key Issue

Overall, I think Hecla's production results and financial performance are impressive, and despite some setbacks, the company remains well-positioned for long-term success.

Here's a look at its 2023 guidance:

Despite facing inflationary pressures and increased investment in its mines, Hecla Mining expects its silver all-in-sustaining cost ((AISC)) in 2023 to remain about the same as in 2022, between $10.25-$11.50/oz. This is an impressive guidance to deliver, given the current inflationary headwinds facing silver miners.

Expect production growth this year as Hecla Mining is progressing at its Keno Hill property, with production expected to begin in the third quarter of 2023. The company plans to ramp up production gradually, reaching 440 tons per day by the end of the year and achieving between 2.5-3 million ounces of silver production.

As of January 2023, Hecla had completed about 40% of the development required to achieve full production at Keno Hill. The company says it estimates that capital spending to bring the mine to full production will be between $35-$40 million in 2023.

Hecla will also see a spending increase at Casa Berardi and Greens Creek. Casa Berardi's increased capital spending is due to the expansion of its tailings facility, while Greens Creek is targeting a throughput of 2,600 tons per day and will require additional equipment purchases and increased capital development, according to the company.

Unfortunately, the one negative in Hecla's guidance is Casa Berardi, the gold mine where costs are expected to remain elevated in 2023, with AISC ranging between $1,975-$2,050 per ounce. Approximately $51-$53 million in capital spending is budgeted for the mine this year, primarily due to the expansion of its tailings facility.

Investors are raising concerns about Hecla Mining's investment in Casa Berardi, as it is a higher-cost mine with declining production (~120k per year) and a relatively short mine life, with 1.19 million proven and probable reserves.

However, the expansion of the tailings facility at Casa Berardi will be completed this year, and it's expected to improve the mine's efficiency and productivity, leading to increased production and lower costs (though we won't see that happen until 2024). So, perhaps some patience is required here.

New Developments: More Exploration Upside

Hecla is going to acquire ATAC Resources ( ATADF ) and its Rackla and Connaught projects at a cost of C$31 million. It looks like Hecla is taking advantage of the low valuations of explorers and adding to its portfolio of high-upside projects.

The Tiger Gold deposit, located within the Rau project at Rackla, is the most advanced-stage asset being acquired, as it contains close to half a million ounces of gold; a preliminary economic assessment pegged its value at $118.2 million , with a pre-tax IRR of 54.5%.

This is a strategic acquisition as ATAC's properties are located within striking distance of Hecla's newly acquired Keno Hill property in Yukon. Again, Keno Hill is estimated to produce 2.5-3 million ounces of silver this year.

I think it's clear that the proximity of these properties to Keno Hill could provide Hecla with operational synergies and opportunities to leverage its existing expertise and infrastructure.

Hecla Mining: The Final Verdict

Hecla Mining Company has struggled but is performing much better than some of its peers, such as First Majestic Silver ( AG ), which had a disastrous Q4 . And I think Hecla's Q4 and 2022 results were pretty good when considering all the difficulties it faced in 2022 - namely, higher-than-expected inflationary pressures, low metal prices, and issues at its Casa Berardi mine.

Hecla is highly leveraged to precious metals, and silver in particular, given its massive silver reserves and production. I think its stock will likely outperform other silver stocks when silver finally does break out from its year-long sideways pattern.

Overall, I think Hecla Mining Company looks like a good bet here for silver bulls.

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