Established in 1891, Hecla Mining Company (HL +4.50%) dubs itself the largest primary silver producer in the U.S. And there are surely years in the company's 126-year history that glitter brightly. With shares falling more than 24%, though, 2017 wasn't one of them. Instead, 2017 was a year investors would be more than happy to let slip from their memories.
Since misery loves company, investors may have turned to the market, hoping for a lackluster year to mitigate the pain of Hecla's uninspiring performance. But it would've been all for naught since the S&P 500 (^GSPC +1.41%) enjoyed a stellar year, climbing more than 19%, and one of the leading silver ETFs, the iShares Silver Trust (SLV +5.35%), rose almost 6%.
Image source: Getty Images.
The prime suspect
Undoubtedly, the event that will most likely inspire shareholders to excise 2017 from their memory banks is the strike at the Lucky Friday mine. The strike, which began in mid-March, resulted from the unionized workers' decision to protest unfair labor practices at the Idaho mine. As of this writing, the labor dispute remains unresolved.
Prior to the strike, Hecla had forecast fiscal 2017 silver production of 3.6 million to 4.1 million ounces, which is comparable to the 3.6 million ounces produced in fiscal 2016. The effect of the strike has been devastating, though. According to preliminary results, management estimates silver production at Lucky Friday was 0.8 million ounces -- a 77% drop compared to production in the previous year.
Lower silver production is by no means the only way to quantify the adverse effect of the strike on the mine. Through the first nine months of 2017, for example, Hecla had incurred $14 million in suspension-related costs due to the strike; moreover, the company reported an operating loss of $9 million compared to an operating profit of $14 million during the same period in fiscal 2016.
The other suspects
The deleterious effect of the Lucky Friday strike is clear, but that's not to say Hecla's other mines didn't provide cause for concern as well. Two of the three other mineral-producing mines in Hecla's portfolio suffered year-over-year declines in production. At Greens Creek, for example, silver and gold production dropped 10% and 6%, respectively, year over year. And at San Sebastian, silver and gold production dropped 24% and 26% year over year, respectively. Looking for something positive to celebrate, investors may have turned to the company's lead and zinc production, but they would find nothing to assuage their disappointment. Lead and zinc production declined 47% and 20%, respectively.
As to be expected, the numerous declines in production severely affected the company's financials.
| Metric | First 9 Months of 2017 | First 9 Months of 2016 | Change |
|---|---|---|---|
| Revenue | $418 million | $481 million | (13%) |
| EBITDA | $102 million | $173 million | (41%) |
| Operating cash flow | $74 million | $173 million | (57%) |
Data source: Morningstar.
As disheartening as these figures may be, things will likely get worse before they get better. When Hecla reports fourth-quarter and fiscal 2017 earnings, the results will likely represent even steeper year-over-year declines in the metrics above -- as well as others.
Investor takeaway
In the press release that provided preliminary fiscal 2017 results, Hecla's president and CEO, Phillips S. Baker, Jr., attempted to present investors with a silver lining by recognizing two things: "First, silver production was better than any other year in our history except last year. Second, our cash position increased $20 million, reflecting what a good year it was for Hecla. We are well-positioned for 2018." But with a cloud of uncertainty hanging over the Lucky Friday mine, investors should be circumspect about adopting Baker's optimism for the year ahead. And even if the labor dispute is resolved, it's imperative that investors also monitor the performances of the company's other mines.
