Growing Silver Miners Gnaw at Hecla's Heels

Just a few short years ago, I would have thought it utterly impossible. Hecla Mining (NYSE: HL  ) , the 120-year-old silver star, seemed an unassailable big shot in the exclusive club of mid-tier silver miners. But as a new generation of emerging mid-tier producers leaps onto the scene with gusto, Hecla may find itself increasingly challenged to maintain the relative dominance it once enjoyed.

Hecla reported this week that its Lucky Friday mine in Idaho will remain idle through February as the company builds a new haulage way to replace the one lost to a rock burst last week. The incident occurred 5,900 feet underground and injured seven miners. While the company insists that the several unfortunate incidents at Lucky Friday this year are not related to one another, it is fairly evident that safety concerns broadly increase with mine depth. As major miner Gold Fields (NYSE: GFI  ) knows well, the famously deep gold mines of South Africa exert a constant array of cost and safety-related pressures.

And as primary silver mines go, Lucky Friday is about as deep as they come. With construction of the underground No. 4 shaft proceeding to expand mining access to 8,800 feet below the surface, the logistical challenges to reliably operating the mine safely appear unlikely to diminish. A strong trailing safety record at Lucky Friday prior to 2011 speaks to the quality of the operation and the existing underground infrastructure, but increasing mine depth is nonetheless a salient factor for investors to be aware of.

Silver challengers in hot pursuit
Strategically speaking, Hecla's string of unfortunate events during 2011 could hardly have struck at a worse time. Hecla's costly settlement of a legacy environmental litigation not only siphoned-off some coveted capital, but it also damaged the miner's long-standing position as one of the most popular investment vehicles for silver.

Although Hecla still forecasts minor production growth, to 9.5 million ounces for 2012, the company's long-term production forecast displays a decidedly stagnant picture until the next anticipated growth spurt in 2016. Coeur d'Alene Mines (NYSE: CDE  ) has effectively entered the ranks of major silver producers by joining Pan American Silver (Nasdaq: PAAS  ) above the 20-million-ounce mark. Unless Coeur d'Alene continues to give away mining claims, as it may have effectively done by failing to pay maintenance fees for claims near its Rochester operation in Nevada, the time for viewing Hecla and Coeur as roughly equivalent rivals may have drawn to a close. In the meantime, several smaller silver producers are poised to enjoy phenomenal production growth that may briskly bridge the gap in scale between Hecla and those emerging rivals.

From 2009 production of 4.3 million silver-equivalent ounces, First Majestic Silver (NYSE: AG  ) has taken the industry by storm with a massive growth spurt that brings the 10-million-ounce mark into view for 2012. By 2014, this rising star expects to tack on an additional 5 million SEOs to convincingly claim bigwig status among the mid-tier producers.

Fortuna Silver Mines (NYSE: FSM  ) expects a major growth spurt of its own as its newly commissioned San Jose mine in southern Mexico (near Oaxaca) carries consolidated production to 4.7 million SEOs for 2012. My recent visit to that sprouting young mine revealed underground development is proceeding far faster than I anticipated, with ramp access already extending well below the resource blocks (blocks "A" and "B") that are slated to enter production after the overlying blocks are mined out during 2012.

Endeavour Silver (NYSE: EXK  ) , whose Guanajuato mining complex I also had occasion to visit this year, is another proven growth vehicle that remains attractively poised to deliver more of the same. With a consolidated resource base (reserves and resources combined) approaching 100 million SEOs, and an array of exciting irons on the fire, I could see Endeavour reaching 10 million SEOs per year before Hecla's output resumes an upward climb.

Hecla's road back to relative dominance
Although several up-and-comers have their sights set on Hecla's current production scale, there is one strategic asset none of them can claim: the $414 million in cash and equivalents adorning Hecla's gorgeously debt-free balance sheet. I suspect we'll see Hecla strike fairly soon here with a major strategic acquisition to juice up its underwhelming growth outlook, and a well-selected target could certainly alter this story in a hurry and set Hecla back on a path toward retained dominance among the mid-tier silver producers. Deals can be difficult to consummate in this environment, where the entire sector appears grossly undervalued, but I would not be surprised to see Hecla take an interest in budding producers like Alexco Resource (AMEX: AXU  ) or Aurcana (OTC: AUNFF).

Hecla possesses some interesting organic growth potential in several past-producing mines that it could potentially reactivate with minimal capital expenditures, but I believe management needs to get those balls rolling a little faster to target production at one or more of those sites before 2016. With 142 million ounces of silver in reserves, Hecla still commands a monster stash of the metal in its existing pair of lucrative U.S. mining operations. A return to safe operation at Lucky Friday and growth-focused execution overall -- along with the company's vanguard dividend policy that links future payouts to the prevailing price of silver -- could go a long way to restore Hecla as a popular investment vehicle for silver, but ultimately I believe that acquiring some near-term production growth is the only way Hecla can effectively keep the wolves at bay and hang onto its long-standing position among the dominant mid-tier miners of silver.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Alexco Resource, Aurcana, Coeur d'Alene Mines, Endeavour Silver, First Majestic Silver, and Hecla Mining. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 23, 2011, at 12:08 PM, Jbay76 wrote:

    I have to admit that my hopes for HL faltered a bit when I read their release about the Lucky Friday incident. They really have had a hard year, but they still have the lowest cash cost around, $1 as of their last report. That being said, it has risen quite a bit this year....correct me if I am wrong but I recall it was once around $0.76 at some point in 2011.

    I never thought about a takeover bid. I own both AXU and AUNFF and would be blown away if either company allowed itself to be bought out by HL. Both of those companies will see amazing growth in teh coming years. AXU is already profitable in their mining sector and had a minor loss in their environmental sector. That loss should be a gain next year though. AUNFF will be explosive from 2012 on when the 100% owned Shafter mine gets going.

    Given the type of year HL has had, and the potential for recurring problems, I would think it prudent to hold onto that money becuase you never know how bad the next one will be. The fact that they are mining deeper equates to more possible problems seems to confirm my belief. I'm still hoping next year erases all my fears. We'll see...

    Happy Holidays

    J

  • Report this Comment On December 24, 2011, at 12:38 PM, XMFSinchiruna wrote:

    JBay,

    HL has ample cash flow coming its way, and even accounting for unforeseen setbacks they have no immediate operational need for anywhere that much cash. The sector is ripe for consolidation, even if some transactions require hostile bids.

    I need to correct something above, though. Hecla had $414m as of sept. 30, but then made its payment of $168m to the environmental litigation settlement in early October. So they now will have $246m plus another injection of cash flow from Q4, and a $100m credit facility.

    As painful as the settlement was for unsuspecting shareholders (the company had prepared the street for a substantially smaller penalty), they have come through the ordeal in strong financial condition.

  • Report this Comment On December 29, 2011, at 9:52 PM, skypilot2005 wrote:

    "Deals can be difficult to consummate in this environment, where the entire sector appears grossly undervalued, but I would not be surprised to see Hecla take an interest in budding producers like Alexco Resource (AMEX: AXU ) or Aurcana (OTC: AUNFF)."

    http://finance.yahoo.com/news/Aurcana-Discovers-New-Silver-i...

    12/13/11

    Aurcana Discovers New Silver Mineralization at Depth at La Negra Mine

    http://finance.yahoo.com/news/Aurcana-Reports-Record-3rd-iw-...

    Aurcana Reports Record 3rd Quarter Results

    11/7/11

    Sky Pilot

    Official Web Link Assistant to Sinch

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