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Hecla Mining Company's 13% Decline in February, Explained

By Sean Williams - Mar 6, 2017 at 9:33AM

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Hecla falls short of Wall Street's fourth-quarter profit forecast and pays the price.

What happened

Shares of Hecla Mining (HL -10.85%), a North American gold and silver mining company with four producing assets, tumbled 13% during February, according to data from S&P Global Market Intelligence. The downward pressure on the stock can likely be traced to two sources.

So what

First and foremost, Hecla Mining reported its fourth-quarter and full-year results on Feb. 23, which wound up inciting some investors to sell.

Man in a business suit pointing to the words "quarterly report."

Image source: Getty Images.

For the quarter, Hecla Mining generated sales of $164.2 million, representing a 42% increase over the prior-year quarter as silver production increased 9%, to 3.98 million ounces, and gold production improved a more modest 5%, to roughly 63,200 ounces. The big key was bringing the San Sebastian mine into commercial production, which added nearly 4.3 million ounces of silver and 34,042 ounces of gold during 2016.

For its all-important bottom line, Hecla Mining generated $11.2 million in adjusted net income, which works out to $0.03 a share. Its adjusted net income grew by 34% year over year as free cash flow demonstrated an even more impressive 152% increase.

So why the decline if the headline data looks this good? The issue is that Wall Street was expecting a slightly more robust adjusted profit of $0.04 per share, meaning Hecla fell victim to an earnings miss like many of its silver mining peers.

The other problem for Hecla Mining, and the silver industry as a whole, is that interest rate hikes from the Federal Reserve are looking more likely in the months that lie ahead. U.S. economic data has been relatively strong, the stock market has been rattling off one new high after another, and inflation has crept back into the picture. Long story short, most Wall Street pundits expect the Fed to continue pushing its monetary tightening policy.

The reason monetary tightening is bad news for precious-metal stocks is because higher interest rates boost the yields on interest-bearing assets. In other words, CDs and bonds become more attractive to investors because of their higher yields. At the same time, physical gold and silver have no yield, so their ability to lure investors away from the near-guaranteed returns of interest-bearing assets is diminished.

Excavator digging in an underground mine.

Image source: Getty Images.

Now what

The good news for Hecla Mining shareholders is that the company's tumble in February probably isn't anything to be too concerned with. Though it may face a few bumps in the road in 2017, it's on track for modest production expansion in the years to come.

As announced last month, Hecla is boosting its exploration expenditures to between $20 million and $25 million in 2017 from $14.7 million last year. This aggressive expansion is merited given the high ore yields in Casa Berardi, San Sebastian, and Greens Creek. It will, however, likely mean an increase in all-in sustaining costs that'll make improving its adjusted year-over-year profit somewhat difficult. However, if Hecla can deliver production expansion in San Sebastian and Casa Berardi, we could see improved cash flow, and Hecla perhaps whittling down its $501 million in long-term debt.

In my opinion, Hecla is more fairly valued right now than most of its peers. Mining companies tend to be valued right around 10 times future cash flow per share (CFPS), and Hecla is valued at nine times its forward CFPS at the moment. A lot is going to depend on its expansion at San Sebastian and any additional properties it brings to the mix. For now, my suggestion would be to add Hecla on your investment radar, but keep your eyes open for even better values in the silver mining industry.

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