Sprawling Blue Skies Over Hecla Mining

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To enjoy success as an investor, a careful examination of the historical context behind a stock's trailing price action is absolutely essential. But sometimes the greatest potential for gains comes from knowing when to let that history go and embrace a company's fresh start.

Embattled silver miner Hecla Mining (NYSE: HL  ) sent a clear indication to the market this week that the company has emerged from a very challenging year behind it, with all eyes focused on its unhindered prospects for a highly profitable long-term future. For investors who are able to bury the stigma of the stock's poor trailing performance, I believe that meaningful upside is in store for the shares over the next several years.

Hecla generated $477.6 million in revenue from 9.5 million ounces of silver produced during 2011 and enjoyed a gorgeous net profit margin of 31.5%, as its extremely favorable cost structure combined with the ongoing secular trend of rising silver prices. The company's debt-free balance sheet features $266 million in cash and equivalents, and a $100 million undrawn credit facility punctuates a robust liquidity condition.

Meanwhile, the bark from the temporary closure of the Lucky Friday mine has proved far worse than its bite. The price tag for all the required remediation work to the mine's main shaft is estimated at just $30 million, and Hecla intends to spend another $20 million on opportunistic capital projects while the operation is on hold. Seven million ounces of low-cost silver production from the company's flagship Greens Creek mine will keep the profit machine churning until production resumes at Lucky Friday in early 2013, and the strategic value of that operation is highlighted by Hecla's $90 million budget for capital projects at Greens Creek during 2012.

40 million reasons to get excited about Hecla's project in Colorado
I have identified Hecla's unique portfolio of properties in proven silver districts as a high-probability road to new discoveries of world-class silver mines to drive the company's long-term growth profile, and Hecla's $28 million exploration budget for 2012 underscores the company's belief in those strategic assets. Hecla will allocate the greatest exploration effort to its San Juan Silver project in Colorado, where CEO Phillips Baker Jr. believes the 40 million-ounce resource acquired with the property package will "convert to reserves quite quickly." Within a 25-mile district-scale land package built around Homestake Mining's truly legendary Bulldog mine that operated until 1985, the proverbial haystack in which Hecla digs for needles is far smaller than those of its rivals.

Fool by Numbers: Hecla's bargain-basement valuation
Even after this week's double-digit surge in the share price, Hecla's enterprise value of $1.13 billion equates to just $7.64 per ounce of silver in Hecla's formidable existing reserve base. Keep in mind that Hecla's earned consolidated net income of $15.85 for each of the 9.5 million ounces produced during 2011. If we add those 40 million ounces that Homestake Mining classified as reserves before 1985, the miner's per-ounce reserve valuation dives to just $6!

When I conducted my last valuation comparison across the silver industry while selecting my top 10 silver stocks for 2012, Silver Standard Resources (Nasdaq: SSRI  ) was the only primary silver producer to emerge with a lower per-ounce reserve valuation (currently $5.52 per ounce). Major producer Coeur d'Alene Mines (NYSE: CDE  ) remains substantially undervalued itself, even with an EV-to-reserves ratio of $11.32 per ounce. And while Coeur still does not pay a dividend, Hecla is leading the way for silver miners by adding a minimum quarterly dividend to its innovative silver-price-linked dividend policy. I consider Silver Wheaton (NYSE: SLW  ) an enduring bargain with a current EV-to-reserves valuation of $13.28 per ounce. In fact, my selection of the Global X Silver Miners ETF (NYSE: SIL  ) as my top ETF for 2012 highlights the broad pattern of disjointed market valuations that I insist is still pervasive throughout the silver-mining industry, despite the ongoing strength in the metal price.

I believe any rational long-term view of the company's earnings potential would require a doubling of the share price even at silver prices substantially beneath the prevailing range. I consider the current share price a product of the market's near-term myopia combined with the stigma of the stock's disappointing trailing performance. But for Foolish investors attuned to the long-term value of the company's world-class silver assets, I believe the shares offer a compelling and unique opportunity. I stand steadfastly by my bullish CAPScall initiated in 2008 at a price of $9.92 per share, and I have every expectation that the pick will emerge from underwater and back into positive territory as silver continues to enjoy this prolonged bull-market cycle.

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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 Coeur d'Alene Mines, Hecla Mining, and Silver Wheaton. We Fools don't 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.

Read/Post Comments (2) | Recommend This Article (17)

Comments from our Foolish Readers

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 February 24, 2012, at 4:08 AM, ziying wrote:

    Chris you are a hard man to keep up with. Since I am fully invested in my IRA I have to sell Peter to buy Paul. I read your articles, I look to see what you and others are buying and I have to decide to buy into the next new thingy. You have given me many great choices and I am in the black on nearly every stock I chose. Now (or again) you have a compelling reason to buy HL. I'm excited about silver. I own AUNFF, FSM and GPL. TC, CLMNF, MLKKF, SMNPF, ALXDF, PZG and CGR are still on my watch list. I guess it's better to have too many choices than not enough. Keep up the excellanent work.

  • Report this Comment On February 28, 2012, at 7:53 AM, XMFSinchiruna wrote:

    "Hecla Mining Co. (HL) says it has encountered high-grade intercepts from its drilling program on the Equity vein at the San Juan Silver property in Creede, Colo. The vein is a major structure that extends for over four miles and recent drilling has identified a high-grade mineralized zone with 150 to 200 feet of strike length that could have more than 1,400 feet of vertical continuity, Hecla says. A year-round underground drill program began in mid-December. There have been 24 holes and 10,861 feet of drilling, varying in spacing from 50 to 100 feet. Of particular importance was a hole over a true width of 18.5 feet which assayed 0.45 ounces of gold per ton and 36.8 ounces of silver per ton, including a zone that had a true width of 6 feet averaging 1.14 ounces of gold per ton and 90.9 ounces of silver per ton. Another hole over a true width of 29.6 feet assayed 0.11 ounces of gold per ton, including a zone that had a true width of 12.5 feet averaging 0.20 ounces of gold per ton and 19.6 ounces of silver per ton. “This drilling program has just begun and has discovered very high-grade mineralization,” says Phil Baker, Hecla president and chief executive. “Our goal will be to confirm that high-grade zones defined by recent drilling on the Equity vein are along the same trend as deeper, significant intersections from surface. As a result, a new resource could be defined which could be complimentary to the 37 million-ounce silver resource defined at the nearby Bulldog vein.” In 2012, the San Juan Silver exploration budget is expected to be approximately $8.5 million."

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