Low silver and gold prices continue to put pressure on miners' shares. Companies like Hecla Mining (NYSE: HL ) have already lost half of their capitalization this year. The coming year's performance depends on how the company has handled the precious metals price decline this year. In my opinion, Hecla did the right things, and is in a good position to profit when the price environment changes.
Maintaining solid balance sheet
A company must have enough liquidity to weather the price storm. Hecla finished the third quarter with $238 million of cash on its balance sheet. Among other silver miners, only Pan American Silver (NASDAQ: PAAS ) and Silver Standard Resources (NASDAQ: SSRI ) have more liquidity available.
Silver Standard Resources had $544 million of liquidity at the end of the third quarter. With just one producing mine and a plethora of different projects, Silver Standard Resources will definitely need this money. Silver Standard's biggest project, Pitarilla, is situated in Mexico, where a new tax on miners will take effect at the beginning of the new year.
Pitarilla is about the size of the Barrick's troubled Pascua-Lama, and is crucial for Silver Standard's future. The company is also pressed by a 30% rise in wage in Argentina, where its only producing mine is situated.
Hecla has used the strength of its balance sheet and the depressed market prices to acquire Aurizon Mines back in the beginning of the year. The purchase gave Hecla exposure to gold, which has suffered less downside than silver this year.
Unlike Hecla, Pan American Silver uses its cash to maintain a strong dividend that yields a hefty 4.7%. Pan American has recently announced its intention to purchase up to 5% of its issued common shares. All shares purchased by the company will be cancelled, which is positive for existing shareholders.
After the purchase of Aurizon Mines, Hecla became a truly diversified miner. Its revenue comes from silver, gold, lead, and zinc from the three mines it currently operates. What's important, Hecla does no long-term hedging on gold and silver. This means that investors will enjoy all the upside when gold and silver prices rebound.
Given the current environment, Hecla had to reduce its 2013 capital expenditures by 26%. However, you can still expect Hecla to grow its production in 2014 as its Lucky Friday mine will finally be operating at full production rates.
So far this year, Lucky Friday produced 817,000 ounces of silver. The company expects it to produce 783,000 ounces of silver just in the fourth quarter. You can expect similar production rates through the next year. Hecla expects that gold production at its freshly acquired Casa Berardi mine will increase as well.
Hecla looks strong going into the next year. Unlike most other silver miners, the company operates in safe jurisdictions. Given the problems with a new tax in Mexico, rising inflation in Argentina, local opposition to mining projects in Chile and Peru, it is a significant competitive advantage.
The company offers rising gold and silver production. On the downside, Hecla had negative operational cash flow in the last two quarters, but this is going to change as Lucky Friday comes into full production rates.
In my opinion, the company has been punished too hard this year. If you believe in the bright future of silver, Hecla is a good candidate for your portfolio.
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