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Over the past year, I have tracked for my readers a series of headaches suffered by legendary silver producer Hecla Mining (NYSE: HL ) , culminating in Hecla's Hangover: the temporary closure of the Lucky Friday mine in Idaho to allow removal of accumulated debris from its primary silver shaft.
As I headed to Vancouver, British Columbia, last week to attend the Cambridge House World Resource Investment Conference, I was eager to sit down with Hecla CEO Phillips Baker Jr.; not to rehash the events that have precipitated a painful decline in the shares, but rather to refocus investor attention upon the unaltered long-term investment outlook for this 120-year-old icon of the silver industry.
In the forthcoming series of articles, featuring memorable excerpts from my conversation with Mr. Baker, I will present the anatomy of a silver company that I consider just as poised to profitably mine silver for the next 120 years as it has been to date. To catch each of these installments, check out the links at the bottom of this article. And to get a wealth of exclusive coverage from the recent conference in Vancouver, please follow me on Twitter or bookmark my article list here.
Greens Creek: Hecla's powerful and reliable cash-flow engine
Christopher Barker: Just as it takes a long-term view to comprehend Hecla's lengthy history, I am far more interested in focusing upon the long-term future of this company than the roughly one-year stoppage at Lucky Friday. Let's begin by discussing the strategic importance of Hecla's Greens Creek mine in Alaska, and how fortunate the company is to be able to target 7 million ounces of silver production from this one mine alone in 2012.
Phillips Baker Jr.: And it's very low-cost silver production. We're not yet releasing our cost estimate for 2012, but clearly over the last 20 years Greens Creek has been one of the lowest-cost silver mines in the world ... consistently. And it will continue to be that. So our margins on those silver ounces are not too far from whatever the price of silver might be.
Barker: Where does Greens Creek fit within the pantheon of the world's great silver mines?
Baker: In the world, Greens Creek is among the 10 largest silver mines, and in the United States it is certainly the largest silver mine. And it's a mine that has consistently replaced reserves. Usually it's every two or three years, you'll see a little decline in the reserves, and then you'll see it gap-up as exploration develops. The mine was put into production in 1989 with a seven-year mine life, so it's remarkable the success we've had with exploration. We currently have about eight or nine years ahead of us in mine life. I would expect that over the next three or four years -- as I look at the reserve / resource base that we have, and where we're going -- that in that period of time we'll have another eight or nine years in front of us.
So it is the underlying cash-flow engine of the company that drives the business. It was an asset that we acquired -- the 70% that we didn't already own -- in 2008. Rio Tinto (NYSE: RIO ) had been the operator of the mine for almost 20 years before that. When we acquired it, we were convinced of a few of things. One is that it was a high-quality asset that would continue to operate consistent with what it had done in the past. Second, that there was lots of exploration potential. And third, that we wanted to have exposure to the metal price. When you put those things together, you have an asset that really drives the total valuation of the company.
Understanding the long-term productive potential of the Greens Creek district
The ultimate scale of the world's greatest precious-metal deposits is seldom understood in advance of production. The fact that Greens Creek commenced in 1989 with a seven-year mine life offers a fantastic case in point, since the current projected mine life some 22 years later remains a bit longer still. Goldcorp's (NYSE: GG ) world-class Penasquito gold and silver mine offers another poignant example, where silver reserves have swelled by a remarkable 92% during the five-year period since Silver Wheaton (NYSE: SLW ) inked its game-changing silver stream agreement for 25% of the Penasquito's life-of-mine production. At full production, it's worth noting, Silver Wheaton's annual take from that watershed silver stream will reach the same 7-million-ounce mark that Hecla is targeting from Greens Creek in 2012. And with a trailing cost of silver production of negative $2.04 (net of by-product credits) through the first nine months of 2011, Hecla's cash margins are even fatter than those resulting from Silver Wheaton's famously profitable cost structure.
Simply stated, the opportunities for organic resource expansion at Hecla's Greens Creek must be understood on two separate axes. On the one hand, the orebody that hosts the current mining operation continues to exhibit strong potential to expand (as Baker discussed above) and periodically extend the mine life. Entirely separate from those on-site exploration efforts, however, Hecla sees potential for the expansive Greens Creek district to host multiple orebodies like the one in production today. It is precisely this sort of potential for discovery of entirely new and legendary orebodies from within the company's delicious portfolio of landholdings that I believe the market has most egregiously overlooked in assigning only about a $1.25 billion enterprise value to the shares. The stock is dirt cheap in relation to its existing portfolio of reserves and resources, with a per-ounce multiple (using silver-only proven and probable reserves plus measured and indicated resources) that is 63% lower than the corresponding resource valuation for rival First Majestic Silver (NYSE: AG ) ! We'll revisit this point when we dive into the valuation case for Hecla's shares in a forthcoming discussion. For now, I'll let CEO Phillips Baker draw your attention to the potential for brand-new discoveries at Greens Creek, which offers a further bonus beyond the bargain valuation of existing silver reserves and resources.
Baker: Greens Creek has grown into a 27-square-mile land package. The largest piece was subject to a dispute with the federal government that started in the mid-1970s and did not get resolved until 1998 by an act of Congress. And so throughout that time, there was no meaningful exploration work conducted other than within the patented mining claims that were not subject to this dispute. So there is a good example of where we didn't focus on it, and Rio didn't focus on it, because it didn't make any sense until the early 2000s.
Geologically, Greens Creek was formed through what is called a "black smoker." Think of it like a little volcano -- not unlike the Hawaiian Islands -- where you have that hotspot and the Earth's crust moves over it over time. Well in this case, the hotspot is frequently spewing out sulphides, so that's what we're looking for. These types of orebodies typically come in a cluster. So that's what we're looking for.
Barker: And the deposit that you're mining right now, that's conceivably just one of those? One of those mineralizing events, basically?
Baker: Right. Correct. And to put that into context, that mine has produced 200 million ounces of silver over the last 22 years, and produced more than 1.2 million ounces of gold, and I couldn't tell you how much lead and zinc. So that's what we're looking for is another one of those with this surface exploration program that we have ongoing.
Now, understand, this is a bit like finding a needle in a haystack. And you're limited to exploring only in the summers. It is very rugged country. And so to get a half-dozen or a dozen holes in during a summer, that's about all you are able to do. But when you have success, you'll go in to follow up, and you'll hit it pretty hard.
So when I look at Greens Creek, this is an example of a district that -- despite how prolific it's been since being discovered by Noranda in 1973 (and subject to the dispute until 1998), and given the poor prices until 2004 -- it's only been in the last seven years that meaningful work has been done, and only then during the summers. So we're in the early stages of this thing despite the 22 years that it's been in production.
As we delve into Hecla's story, I'll post links to the entire series right here:
- Anatomy of a Silver Legend: Hecla's Greens Creek Mine
- Anatomy of a Silver Legend: Hecla's Dominance in Idaho's Silver Valley
- Anatomy of a Silver Legend: 2 Roads to Long-Term Growth
- Anatomy of a Silver Legend: The Next 120 Years for Hecla Mining
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