Is Hecla Mining Company a Buy?

Not much went right for Hecla Mining (HL +0.83%) in 2017. Much of the company's recent woes could be chalked up to a self-inflicted wound stemming from management's handling of a labor dispute, which resulted in the shutdown its coveted Lucky Friday mine in mid-March 2017. The site remained offline as of this writing.

While removing the entire contribution from a major asset would be bad enough on its own, the company's remaining three mines all reported significant year-over-year declines in operating income through the first nine months of 2017. The result: a gold and silver stock on the slide. Does that create an opportunity to buy Hecla Mining Company right now, or should investors continue to avoid the stock?

Image source: Getty Images.

How we got here, and what's ahead

The Lucky Friday mess is unfortunate. It's a long story, but unionized workers grew unhappy with management's offers during negotiations to replace an agreement that lapsed in April 2016. They protested by going on strike on March 13, 2017 -- and haven't come back since. Neither side seems willing to cross the hard lines they've drawn in the sand. Lucky Friday has been offline for nearly three full quarters now (and counting). And the National Labor Relations Board is getting involved.

It's a mess.

It's also been horrible for business, as shareholders are well aware. But Hecla Mining's other major mines haven't exactly pulled their weight in Lucky Friday's absence. Consider the mine-by-mine operating performance through the first nine months of 2017: 

Data source: SEC filings.

After record operations in 2016, Hecla Mining posted a 13% drop in total revenue and 43% drop in operating income through the first three quarters of 2017. That's pretty awful, but perfectly illustrates the risks involved in precious metals stocks.

In addition to keeping a watchful eye on selling prices for gold and silver, investors must contend with the fact that the output of mines degrades over time. Even expansion projects intended to extend the useful life of a mine usually come with lower-quality ore, which results in lower operating margins.

That's something to keep in mind for San Sebastian, which will have its useful life extended to 2020 (it was expected to be exhausted by the end of 2017). The mine already contributed $17 million less in operating income in the first nine months of 2017 than the year-ago period. So, unfortunately, even after expansion it's unlikely to match its 2016 totals, let alone make up for falling contributions from other mines.  

Investor takeaway

There are two ways to look at Hecla Mining stock right now: the optimistic view and the pessimistic view. It stands to reason that when Lucky Friday comes back online, operations will receive an immediate boost. Revenue, profits, and cash flow would all see increases compared to what was achieved in 2017, even if unusual expenses were incurred for restarting operations. Couple that with continued strength in gold and silver prices -- both of which are up compared to this time one year ago -- and squeezing two or three more useful years out of San Sebastian, and the stock could be waiting to at least recover some lost ground.

On the other hand, things could get worse for Hecla. Unionized workers have been on strike since mid-March 2017 and seem unlikely to suddenly end their protest without extracting more favorable terms from the company, which has been significantly damaged by the labor dispute. Even if the mine restarted operations soon, there's no guarantee it could single-handedly make up for declining operations from Hecla Mining's other three major assets after ramping up to historical levels of output. The San Sebastian expansion could be accompanied by higher costs. And precious metals prices are unpredictable and out of management's control.

Given the uncertainty surrounding the stock, I would have to encourage investors to pass on buying Hecla Mining right now.