Part I – Introduction
Idaho-based Hecla Mining (NYSE:HL) produces about one-third of all silver made in the USA and relies heavily on this commodity. However, the gold segment represents a more significant part of the revenues, as the chart below shows:
The Company released its second quarter of 2022 results on August 4, 2022.
Note: This article is an update of my article published on May 14, 2022. I have followed HL on Seeking Alpha since June 2019.
On July 5, 2022, Hecla Mining announced the acquisition of Alexco Resources (AXU). The investment should be completed this week. It is an all-share deal. Also,
Hecla has also entered into an agreement with Wheaton Precious Metals Corporation (WPM) to terminate its silver streaming interest at Alexco’s Keno Hill property in exchange for $135 million of Hecla common stock conditional upon the completion of Hecla’s acquisition of Alexco.
Note: Each outstanding common share of Alexco will be exchanged for 0.116 of a share of Hecla common stock, implying a consideration of US$0.47 per Alexco.
It is a great acquisition with excellent growth potential.
President and CEO Phillips Baker said in the conference call:
I’m very confident that lower silver prices will lead to higher silver prices, significantly higher prices. So, that’s the context that we are looking at the quarter and the rest of the year. We are investing in our mines and acquiring new ones because we have the organization and the financial capability to grow production earnings and cash flow and we believe shareholders are going to benefit from the growth of that, investing in our three mines and acquiring Alexco.
1 – 2Q22 results snapshot
Hecla Mining announced that the Company produced 3,645.5K Ag Oz and 45,719 Au Oz in the second quarter of 2022. Revenues were $191.24 million.
The Company’s silver mines reported a total cost of sales of $115.91 million. AISC per silver ounce (by-product basis) was $8.55.
HL has a liquidity of $335 million.
2 – Stock performance
HL has underperformed the VanEck Vectors Gold Miners ETF (GDX) and the iShares Silver Trust (SLV) significantly on a one-year basis. Hecla Mining is down 39%.
3 – Investment thesis
Despite a struggling commodity environment and inflationary pressures, I continue rating HL as a potential long-term investment in gold and silver.
I can see some potential, especially after the steep drop in stock price, which offers an excellent opportunity to build a safe long-term position with assets in North America, which is an extra plus.
However, as I said in my preceding article, the Company is small and presents recurring technical weaknesses. Inflationary pressures are an increasing issue, especially for the Casa Berardi mine, but the by-product metals (lead and Zinc) partially offset their harmful effects.
CFO Russell Lawlar said in the conference call:
All these factors manifest themselves into overall higher costs of 15% to 20% over our guidance. While the impact of inflation is offset to a degree by our byproduct credits at the silver mines, the Casa Berardi mine is more exposed to inflationary pressures due to more tons moved there versus our other mines.
Thus, I suggest trading short-term LIFO HL using at least 40% of your total position – more details at the end of this article.
Hecla Mining – Company Balance Sheet And Production In 2Q22 – The Raw Numbers
Hecla Mining | 2Q21 | 3Q21 | 4Q21 | 1Q22 | 2Q22 |
Sale Revenue and others in $ million | 217.98 | 193.56 | 185.08 | 186.50 | 191.24 |
Net Income in $ million | 0.79 | -0.98 | 11.88 | 4.15 | -13.52 |
EBITDA $ million | 54.79 | 46.64 | 29.54 | 55.65 | 35.44 |
EPS diluted in $/share | 0.00 | 0.00 | 0.00 | 0.01 | -0.03 |
Cash from operating activities in $ million | 86.30 | 42.74 | 53.36 | 37.91 | 40.18 |
Capital Expenditure in $ million | 31.90 | 26.90 | 28.84 | 21.48 | 34.33 |
Free Cash Flow In $ million | 54.41 | 15.84 | 24.52 | 16.43 | 5.85 |
Total cash $ million | 181.49 | 190.90 | 210.01 | 212.03 | 198.19 |
Total debt in $ million | 523.43 | 521.89 | 521.48 | 523.43 | 534.54 |
Dividend per share in $ | 0.011 | 0.00625 | 0.00625 | 0.00625 | 0.00625 |
Shares outstanding (diluted) in a million | 542.26 | 536.97 | 543.13 | 544.06 | 539.40 |
Silver and Gold Production | 2Q21 | 3Q21 | 4Q21 | 1Q22 | 2Q22 |
Silver Production K Au Oz | 3,525 | 2,676 | 3,227 | 3,325 | 3,645 |
Gold production K Ag Oz | 59.14 | 42.21 | 47.98 | 41.64 | 45.72 |
Silver realized $/oz | 27.14 | 23.97 | 23.49 | 24.68 | 20.68 |
Gold price realized $/oz | 1,825 | 1,792 | 1,797 | 1,880 | 1,865 |
Ag AISC by-product | 7.54 | 12.82 | 10.08 | 8.66 | 8.55 |
Data Source: Company material 10-Q.
Part II – Analysis: Silver And Gold Production Details For The Second Quarter Of 2022
1 – Total Silver/Gold production
This quarter, gold and silver production increased sequentially, with silver production of 3.65 Moz and gold production of 45,719 Oz. This quarter’s substantial output was driven by higher grades and, coupled with high by-product prices, resulted in favorable costs.
Below is the production history at the Greens Creek mine, which is the Company’s flagship:
Details per mine below:
Metal price in 2Q22 | Price $ |
Gold per ounce |
1,855 |
Silver per ounce | 20.68 |
Lead per Lb | 0.99 |
Zinc per Lb | 1.32 |
2 – All-In Sustaining Costs and Silver price realized history
AISC silver is relatively low and gives the Company a significant profit margin even if the silver price has dropped significantly.
3 – 2022-2024 Outlook unchanged
The guidance is the same as indicated in my preceding article. However, the outlook will be revised in 3Q22 after the completion of the merger with Alexco.
Part III – Financial Snapshot
1 – Total Revenues were $191.24 million in 2Q22
The revenues were $191.24 million in 2Q22, down from $217.98 million a year ago and up 2.5% sequentially.
Hecla Mining reported a second quarter loss of $13.52 million, or 0.03 per diluted share, compared to an income of $2.75 million in the same period a year earlier, or $0.01 per diluted share.
2 – Free Cash Flow was $5.85 million in 2Q22
Note: The generic free cash flow is the cash from operating activities minus CapEx.
Trailing 12-month free cash flow is $62.64 million, with a free cash flow of $5.85 million this quarter.
3 – The net debt is $337.4 million in 2Q22
The Company indicated $198.19 million in total cash. Net debt is now $337.4 million. Available liquidity is over $335 million for the second quarter. The Company expects lower cash on hand in H2 2022.
CFO Russell Lawlar – SVP and CFO, said in the conference call:
As a result of these investments being made to the operations and the current price environment, we anticipate seeing the balance of our cash come down in the last half of this year.
4 – Proven and Probable reserves in 2021
This segment has not changed since my preceding article. The Company posted Proven and Probable silver and gold reserves of 199.92 million Ag ounces and 2.73 million Au ounces of gold, significantly higher than last year.
Also, by-product metals, lead, and zinc reserves were 734.7 thousand tons and 906.9 thousand tons, respectively.
Part IV – Technical Analysis And Commentary
Note: The chart is adjusted for the dividend.
HL forms a descending Triangle pattern with resistance at $4.2 and support at $3.80.
The trading strategy is to take profits between $4.15 and $4.40 and accumulate below $3.80, with a possible lower low at $3.20.
As I said in my preceding article, I recommend using about 50% of your long position to trade LIFO, which is perfectly adapted to the high volatility of the gold and silver sectors, which are struggling after the FED’s action against rampant inflation.
Gold and silver prices have dramatically retreated since mid-April due to the Fed’s hawkish move against inflation. The silver price is going down even faster, outperforming gold significantly, which is not a good omen for HL. Silver is down nearly 28% on a one-year basis.
However, if the gold and silver prices can somehow turn bullish from here, which is not likely, HL could trade above $5.15 with a possible retest of $6.25.
Note: The LIFO method is prohibited under International Financial Reporting Standards (IFRS), though it is permitted in the United States by Generally Accepted Accounting Principles (GAAP). Therefore, only US traders can apply this method. Those who cannot trade LIFO can use an alternative by setting two different accounts for the same stock, one for the long term and one for short-term trading.
Warning: The TA chart must be updated frequently to be relevant. It is what I am doing in my stock tracker. The chart above has a possible validity of about a week. Remember, the TA chart is a tool only to help you adopt the right strategy. It is not a way to foresee the future. No one and nothing can.
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