This year could see a huge increase in Hecla Mining Company's (HL 0.57%) production. On the surface, that sounds great, but when you dig into the reasons, it's not nearly as positive as it seems. Here's what you need to know about this gold and silver miner to decide if Hecla Mining Company is a buy in 2018...or not.
A tough year
Last year wasn't a good one for Hecla Mining. Although gold production in 2017 was flat year over year, silver production fell nearly 30%. Lead and zinc production, two smaller businesses for the miner, fell around 50% and 20%, respectively, as well. This happened at a time when commodity prices were relatively strong.
Image source: Getty Images.
There were two notable issues last year. First was falling production at the company's San Sebastian Mine. The gold and silver extracted from this asset fell 26% and 24%, respectively, between 2016 and 2017. That drop is worrisome, though not unexpected. Hecla knew that the mine would only produce for a couple of years without further investment. However, management believes it can extend the life of the mine for a bit longer and is taking steps to do so. San Sebastian's results aren't good, but the news here isn't a total disaster.
The other issue is more troublesome. Silver production at the company's Lucky Friday mine declined by a massive 77% year over year in 2017. That was a shock to the company and investors because it is the result of a strike that started in March of 2017. As of this writing, the strike has yet to be resolved. It's important for a miner to keep costs under control, but the cost of taking a hard line in this case has been extremely large. And it keeps growing with every day that passes.
Do you buy its ability to resolve these issues?
Stepping back, 2018 production could see a huge uptick if the strike at Lucky Friday ends. And that wouldn't take anything more than a return to normal production levels. So there's actually material upside potential at Hecla.
Lucky Friday is an important asset, but the strike is a big problem. Image source: Hecla Mining Company.
However, this strike has gone on for more than nine months without a resolution. And the National Labor Relations Board went so far as to issue a complaint over Hecla's actions leading up to the strike. This is clearly a contentious fight. It's also important to note that this isn't a mine located in a country with loose legal standards and weak unions; Lucky Strike is in northern Idaho. Resolving the strike could be more difficult than you think.
And so far the impact on the shares has been notable. Hecla's stock fell 24% in 2017. In fact, the shares fell 20% in November alone after the company announced financial results. The news wasn't very good, largely because of production declines. Investors are clearly sensitive to what's going on at Hecla's mines right now. Although the stock is up around 7% in early 2018, until there's a resolution at Lucky Friday, conservative investors are probably better off avoiding Hecla.
However, there's notable upside recovery potential here. All that it would take is for the company to come to terms with the union at Lucky Friday. That one change would add nearly 3 million ounces of silver back to the company's production tally. So if you are an aggressive investor with a glass-half-full outlook, you might find Hecla an appealing bet. The problem is that there's little way for you to tell when the wait for a solution will end. In other words, an investment in Hecla could be dead money for an unknown amount of time.
Investor takeaway
I believe Hecla is not a buy in 2018. There's just too much uncertainty with regard to the very long strike at the company's Lucky Friday mine. Until there's a resolution there, most investors are probably better off looking at a different miner. That said, more aggressive investors might find the recovery potential alluring. If that sounds like you, just make sure you carefully consider how unpredictable the timing of a resolution could be here.
