They may have brief runs of impressive gains, but gold stocks have historically had a difficult time beating the S&P 500 over five- and 10-year periods. Why is that? Well, it probably has something to do with the fact that mining precious metals is difficult, expensive, and full of regulatory and labor landmines. There are many more chances for things to go wrong than for them to go right.
The industry's poor performance can be summed up by the one-year performance of Hecla Mining (HL) and Tahoe Resources (NYSE: TAHO), down 27% and 63%, respectively.
That's not very encouraging, but you know what they say: be greedy when others are fearful. Recent misery notwithstanding, which gold stock currently down on its luck is the better buy?
Image source: Getty Images.
A few words on risk
It's important to note that both stocks have declined for good reasons that demonstrate the risks of investing in the industry. Hecla Mining's first-half 2017 performance was significantly impacted by the production halt at one of its four operating mines, Lucky Friday, which has been anything but lucky since workers went on strike in early March. The company is now being sued for labor law infractions by the National Labor Relations Board, with a hearing set for September 19.
The timing couldn't have been worse. The company was in the process of transitioning mining locations at two mines, which resulted in the production of lower grade ore -- and therefore lower revenue and operating income -- during the first half of the year. When coupled with labor-related expenses incurred at Lucky Friday and zero production for the entire second quarter, it's been an expensive 2017.
Hecla Mining isn't alone in delivering uncertainty to shareholders. Tahoe Resources recently suspended its monthly dividend distributions and internal guidance after encountering turmoil in Guatemala. An NGO asserted that the country's Ministry of Energy and Mines unlawfully granted one of the company's subsidiaries a license for the Escobal mine. The Supreme Court even stepped in, temporarily suspending the operating license until the situation can be sorted out. That could take up to 18 months, according to the company.
The mine accounted for 99% of the company's total silver production during the first half of the year, while contributing about 2% of company-wide gold production. To say the least, it's not a great development for the company.
The matchup
Misery notwithstanding, is there an opportunity in either Hecla Mining or Tahoe Resources for investors with a high tolerance for risk and a long investing horizon? Here's how they stack up in a head-to-head comparison:
|
Metric |
Hecla Mining |
Tahoe Resources |
|---|---|---|
|
Market cap |
$1.96 billion |
$1.72 billion |
|
PE ratio, current |
19.9 |
11.1 |
|
PE ratio, future |
25.9 |
12.9 |
|
Price to sales ratio |
3.16 |
1.95 |
|
Price to book ratio |
1.29 |
0.66 |
Source: Yahoo! Finance.
It's not at all surprising that Tahoe Resources appears pretty cheap on paper after falling 63% in the last year. The Guatemala news alone has dropped the stock 33% since the first day of July, while future earnings metrics have yet to be readjusted.
Both companies face future uncertainty and risks that could significantly alter long-term operations. If Hecla Mining is found to have run afoul of labor laws for workers at Lucky Friday, then it could expect higher costs at the mine in the future. However, it's the company's only operating mine even partially represented by a union, so it shouldn't jeopardize the long-term low-cost profile. Shifts in the quality of ore or investments needed in new technology could be a different story.
There's significantly more uncertainty regarding the future of Tahoe Resources. While it operates more mines than Hecla Mining, which helps to spread risks, the possibility that it completely loses the ability to operate the valuable Escobal mine could devastate performance. Worse, investors won't know the outcome for 12 to 18 months. Uncertainty is never kind to stocks.
Which stock is the better buy?
Taking everything into account, I think Hecla Mining is the better buy in this matchup. The uncertainty it faces is relatively tame compared to that of Tahoe Resources. Plus, future investments (albeit costly up front) in electric and autonomous equipment at mines could reduce costs once fully implemented years from now, while two moth-balled mines could be coming back online in the next few years.
That said, I'm not a big fan of precious metals stocks for the simple reason that they don't usually come close to even matching the long-term performance of the S&P 500. Therefore, I won't be buying either stock.
