This past year started off well for Hecla Mining (NYSE:HL). After a 2016 in which it skyrocketed 177%, the silver and gold miner surged another 23% to start 2017. However, the stock lost its footing in February, and, after partial a recovery that petered out in early June, stuttered and slid for the rest of the year. After tanking another 20% last month, its year-to-date decline hit 28% in mid-December.
Here's a look at what went wrong this year for the company, and Hecla's prospects for a rebound in 2018.
Bad luck, self-inflicted wounds
Hecla Mining's stock started cracking after it reported fourth-quarter 2016 results in late February. On the surface, the numbers looked good: Sales surged 42% year over year to $164.2 million thanks to a 9% increase in silver production and 5% higher gold output. Meanwhile, net income rose 34% to $11.2 million, or $0.03 per share, while free cash flow rocketed 152%. Yet as good as those results appeared to be, they weren't as good as investors expected; Hecla missed the consensus EPS estimate by $0.01 per share.
Those lackluster results continued throughout the year. In fact, by the second quarter, the company's business had deteriorated significantly, with revenue dropping 22% year over year to $124.3 million, a net loss of $0.06 per share and cash flow down 89%. The main issue was a miners' strike at its Lucky Friday mine in Idaho, which cut production by 858,000 ounces compared to Q2 2016, and lopped $23 million from the top line.
That strike continued in Q3, causing production from the mine to plunge 90%, leading to a 21% drop in revenue year over year. That had a deep impact on profitability: Net income fell from from $25.7 million in the Q3 2016 to $1.3 million last quarter.
2018 will be a bit of a coin flip
Workers at the Lucky Friday Mine walked out en masse in mid-March after rejecting the company's "last, best, and final offer." While Hecla said at the time that the strike would "not have a material impact on our financial position," that hasn't proven to be the case. Until the company settles this dispute over pay and working conditions, the loss of production will continue weighing on results. However, if the company and union workers reach an agreement soon, it could drive the company's financial results higher, assuming precious metal prices hold up.
Another concern is that the company's San Sebastian mine, which started operations in 2015, only initially had a two-year forecast mine life. Hecla management had anticipated that exploration successes would extend that by a few more years, and it appears they were right. The company recently secured the mill supporting the mine through 2020 because it believes it has uncovered or will discover enough reserves to keep it open that long. That said, these new resources might not be as profitable, at least in the near term, which could impact results next year.
In addition to the uncertainty surrounding those mines, precious metal prices remain a question mark. While both silver and gold rose in 2017, they could be under pressure next year considering that the Federal Reserve plans to continue raising interest rates, and non-producing assets like gold and silver have a new competitor in the form of cryptocurrencies such as bitcoin, which have been all the rage in 2017. On the other hand, if inflation perks up or if cryptos lose their luster, precious metal prices could continue rising.
Hecla Mining's stock could bounce back sharply in 2018 if it settles the Lucky Friday strike, San Sebastian keeps producing, and precious metal prices at least hold up. However, that's asking a lot. A stock that needs this many unrelated catalysts to to play out in its favor for it to be a clear winner is a bit more of a gamble than many investors will be comfortable with. Because of that, it seems better to watch this miner from a distance for now.