Hecla Mining Company Remains Vulnerable to Gold Price Downside

High costs at Casa Berardi gold mine make Hecla sensitive to the gold price downside.

May 15, 2014 at 10:17AM

So far, Hecla Mining's (NYSE:HL) move into gold with the purchase of Aurizon Mines in 2013 has paid off handsomely as gold outperformed silver both this year and last year. Not surprisingly, the company's first quarter report revealed increased reliance on this precious metal. Gold's share in total revenue increased in comparison with the previous quarter and totaled 41% of company's revenue. Meanwhile, silver brought 31% of revenue, zinc contributed 17%, and lead added 11% of revenue. However, increased share of gold in the revenue mix makes Hecla Mining more vulnerable to gold price downside.

Casa Berardi is still a relatively high-cost mine
Hecla Mining produces gold from two mines – Casa Berardi in Canada, which was acquired in 2013, and Greens Creek in Alaska. While Greens Creek is primarily a silver mine, Casa Berardi produces gold. Casa Berardi's share in Hecla's first quarter revenue was 33%, so the mine's results have a significant impact on the company's bottom line.

Hecla reported that cash costs of gold production at Casa Berardi were $886 per ounce in the first quarter. Cash costs should not be confused with all-in sustaining costs, which include sustaining capital and better represent the true costs of mining gold.

That said, cost leaders among gold miners like Barrick Gold (NYSE:ABX) and Goldcorp (NYSE:GG) had first quarter all-in sustaining costs that were lower than Casa Berardi's cash costs. High costs at Casa Berardi leave Hecla's bottom line sensitive to changes in the price of gold, and also explain why Hecla's shares hit a multi-year bottom back in December when gold prices were at their lowest levels.

Could Hecla Mining become a takeover target?
A very interesting question was asked during the recent earnings call. An analyst wondered if Hecla considered being acquired. This question was of course inspired by the recent activity in the acquisition front by Agnico Eagle Mines (NYSE:AEM) and Yamana Gold (NYSE:AUY), which jointly acquired Osisko Mining. Osisko's main asset, the Malartic mine, is situated in Canada, just like Casa Berardi. Although Hecla management's answer to the question was vague, it did state that Hecla would possibly consider any opportunity should it present itself.

There are still players on the market that could afford acquisitions. For example, Goldcorp was willing to pay a price for Osisko Mining almost three times as much as current Hecla's capitalization. However, there are currently no signs that Hecla Mining could be acquired by anyone.

That said, Hecla remains in good shape and has no incentive to search for a buyer. The company's revenue is growing steadily, while operational cash flow has been positive for two quarters in a row. Hecla is well positioned to deliver solid results in the current environment, but one cannot count on robust growth without help from the pricing side.

Bottom line
Hecla Mining's shares are unlikely to have big upside if gold and silver prices remain at current levels. What's more, relatively high costs at the Casa Berardi gold mine leave Hecla vulnerable to gold price downside. However, the company's solid operations and healthy balance sheet make it well positioned to profit from the next upside cycle in precious metals.

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