Warren Buffett attracts a lot of attention. As the world's third-richest person and most celebrated investor, thousands try to glean what they can from his thinking processes and track his investments.
While we can't know for sure whether Buffett is about to buy Hecla Mining
In his most recent 10-K, Buffett lays out the qualities he looks for in an investment. In addition to adequate size, proven management, and a reasonable valuation, he demands:
- Consistent earnings power.
- Good returns on equity with limited or no debt.
- Management in place.
- Simple, non-techno-mumbo-jumbo businesses.
Does Hecla meet Buffett's standards?
1. Earnings power
Buffett is famous for betting on a sure thing. For that reason, he likes to see companies with demonstrated earnings stability.
Let's examine Hecla's earnings and free cash flow history:
Source: Capital IQ, a division of Standard & Poor's. Free cash flow is adjusted based on author's calculations.
Over at least the past five years, Hecla's earnings have remained relatively consistent, with the exception of 2008, which was partially affected by merger and restructuring costs related to its acquisition of the Greens Creek silver mine.
2. Return on equity and debt
Return on equity is a great metric for measuring both management's effectiveness and the strength of a company's competitive advantage or disadvantage -- a classic Buffett consideration. When considering return on equity, it's important to make sure a company doesn't have an enormous debt burden, because that will skew your calculations and make the company look much more efficient than it actually is.
Since competitive strength is a comparison between peers, and various industries have different levels of profitability and require different levels of debt, it helps to use an industry context.
|
Company |
Debt-to-Equity |
Return on Equity (LTM) |
Return on Equity (5-year average) |
|---|---|---|---|
| Hecla Mining | 1% | 7% | 12% |
|
Silver Wheaton |
4% | 17% | 11% |
|
Silvercorp Metals |
0% | 28% | 33% |
|
Coeur d'Alene Mines |
10% | (3%) | 2% |
Source: Capital IQ, a division of Standard & Poor's.
Since 2008, Hecla has generated moderately low returns on equity. The company employs almost no debt.
3. Management
CEO Phillips Baker has been at the job since 2003. Prior to that, he was its CFO and COO for a few years and had held other positions at other miners such as Pegasus Gold and Battle Mountain Gold.
4. Business
Precious metals mining isn't particularly susceptible to technological disruption, though the industry can face the cyclicality inherent to its products.
The Foolish conclusion
Regardless of whether Buffett would ever buy Hecla, we've learned that the company doesn't generate high returns on equity, though it does exhibit some of the other characteristics of a quintessential Buffett investment: fairly consistent earnings, tenured management, and a more-or-less straightforward industry.
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