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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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