Please ensure Javascript is enabled for purposes of website accessibility

Is Hecla Mining Company a Buy?

By Matthew DiLallo – Nov 20, 2018 at 5:48PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The precious-metals mining company’s value has declined significantly this year.

Shares of Hecla Mining (HL 2.34%) have shed nearly 40% of their value this year. It's not alone; CEO Phil Baker led off the company's recent third-quarter call by stating: "I want to start by acknowledging that while gold and silver have declined 7% and 14%, respectively, since the beginning of the year, almost all precious metals equities, including Hecla, have declined more."

However, just because shares of Hecla Mining have underperformed precious metal prices doesn't automatically mean it's a good buy. For that, investors need to dig much deeper.

The bull case for Hecla Mining

Baker laid out his bull case for the company on the conference call. Continuing his discussion on this year's sell-off, he stated:

I don't think [shares of mining companies] should have declined that much, particularly Hecla, because with our strategy of having long-lived, low-cost mines in great jurisdictions, we can stay the course in practically all price environments.

I cannot emphasize how important that is for running a sustainable business.

One of the ways the company has done this is by improving the economics of its mines, which enables it to weather the storms of lower precious-metal prices.

Gold bars with a price chart in the background

Image source: Getty Images.

Because of that, the company is optimistic about what lies ahead, especially at its newly acquired mines in Nevada. The company has already made several improvements to these operations, which should drive down costs. These actions position the company to deliver better results from these mines, starting in the second half of next year.

In addition to the upside at those mines, the company also believes its Greens Creek mine in Alaska has even better days ahead. Baker noted on the call that while the mine has already generated $1 billion in free cash flow over the past decade, it's "getting better, with higher grades coming in 2019, 2020, and beyond." Those higher grades should drive strong cash flow production.

The upside potential from these mines, combined with the company's exploration efforts and the underlying stability of most of its legacy mines, leads Hecla to believe that it can richly reward investors in the coming years.

The bear case for Hecla mining

Like most mining stocks, Hecla Mining lives and dies with precious-metal prices. As noted earlier, those prices have slumped this year due to a variety of factors. That decline has weighed on Hecla Mining's financial results: It reported a net loss through the first nine months of the year, versus a slight profit in the same period of 2017. If prices continue falling, they'll likely put more pressure on profitability. It is worth noting, though, that cash flow is flat due to the addition of the Nevada mines, as well as the company's cost-saving initiatives.

Hecla's recent losses are a potential problem, because it had $534 million in debt as of the end of last quarter. On the one hand, CFO Lindsay Hall stated on the call that he is "quite pleased with the balance sheet" since the company was able to complete its recent acquisition while maintaining a comparable level of liquidity and the same amount of debt outstanding.

However, the company has a significant amount of debt considering its size of $1.7 billion by enterprise value, so its debt load could weigh down the company's stock price if precious metal prices continue falling. While Baker noted on the call that "the management team has been at this a long time and we understand the risk of debt," they still might need to reduce expenditures to manage the balance sheet. That financial belt-tightening could impact the company's ability to explore and expand in the future.

High upside potential with just as much risk

While the market has pummeled Hecla's stock this year, the company believes the sell-off is overdone, especially given its ability to improve the operations of its mines. Shares could have significant upside, especially if precious metal prices rebound.

However, given the company's debt level, which makes it more sensitive to changes in silver and gold prices, shares could fall even further. That's why investors might be better off considering one of the top gold mining stocks instead, since they offer lots of upside with less risk.

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Hecla Mining Company Stock Quote
Hecla Mining Company
HL
$3.94 (2.34%) $0.09

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
326%
 
S&P 500 Returns
102%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/02/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.