You'd expect a silver mining stock to move in line with silver prices, but that's not always the case. So while shares of Coeur Mining (CDE -2.79%) were flat last month, pretty much like silver, Hecla Mining (HL -1.74%) stock plunged 20.8%, marking one of its worst months so far this year. What should investors in Hecla make of the sharp fall?
Hecla shares took a nosedive right after the silver miner announced its third-quarter numbers on Nov. 7. As you might've guessed, Hecla's numbers were far from encouraging.
Hecla's sales dropped nearly 21% year over year, largely because of a long-drawn labor strike at one of its key mines, Lucky Friday, that hit production hard. In contrast, it was higher production volumes that helped rival Coeur Mining grow its revenue by 1% in Q3 despite pressure on metal prices. It's also worth noting that Hecla currently has only three mines in operation -- Greens Creek, Lucky Friday, and San Sebastian -- which places it at a disadvantage to rival Coeur which has five operating mines, including high-potential ones like the Palmarejo in Mexico.
Investors in Hecla are rightly miffed, what with the strike at Lucky Friday stretching beyond three quarters now. Production from the mine plunged 90% in Q3. To make matters worse, Hecla's profits in recent years were getting a strong boost from its San Sebastian mine, which started operations in 2015. San Sebastian, however, has limited reserves, and Hecla is nearing the end of the mine's initially forecast two-year life. While the company hopes to be able to keep production from San Sebastian running through 2020, cash flows from the mine are declining rapidly.
With Hecla's third-quarter net income tumbling to only $1.3 million from $25.7 million in the year-ago quarter, the fall in Hecla shares last month wasn't surprising.
First things first, it's high time Hecla deals with its labor issues and brings the strike at Lucky Friday to end. A settlement is the only near-term trigger that could reverse Hecla stock's southward-bound trend.
That aside, investors also need greater visibility into San Sebastian, which is unlikely to see production levels of 2016 again. It's important that Hecla has back-up plans to plug any production gap from any of its mines to keep its business running.
Long story short, there's little to frame Hecla's investing thesis, and you might be better off staying on the sidelines unless you're a trader.