There are two ways to recover from a fall. One option is to get back up and continue on as before. The other is to view the fall as a blessing in disguise, and whip yourself into shape so that you never fall again. I think Hecla Mining (NYSE: HL) has chosen the latter path.
The temporary forced closure of the Lucky Friday mine in Idaho dealt a tough blow to Hecla and its shareholders, and we're still a couple of quarters away from the production restart that will carry Hecla's output back above the 10 million-ounce mark. Owing to the 39% reduction in silver production from the prior-year period, and a 24% dip in the average realized silver price, Hecla earned just a modest net income of $2.4 million during the second quarter.
After working through some lower-grade material at the Greens Creek mine in Alaska, furthermore, total 2012 output now looks to fall a bit shy of the earlier target of 7 million ounces. Still, Greens Creek will yield "greater than six million ounces" for the year.
Although Hecla has not been immune to the intense cost pressures that are plaguing the precious-metal mining industry, its second-quarter cash cost of just $1.03 per ounce (net of by-product credits) remains among the lowest in the business. But don't be lulled into total complacency by cash costs alone, as those are often principally a reflection of the multi-metallic richness of a deposit. Hecla did see a 23% surge in per-ton mining costs at Greens Creek due (primarily) to the "increased use of contract miners." Monitoring cost structures beyond the frequently touted cash cost figures is the responsibility of every single mining investor, and Fortuna Silver Mines (NYSE: FSM) offers a poignant example of what can happen when those cost structures take a turn for the worse.
But today I wish to focus instead upon the extremely positive steps Hecla is undertaking to build a rock-solid foundation for its long-term growth pipeline. First, Hecla is investing heavily in its two existing mines with projected 2012 capital expenditures of $130 million (predominantly at Greens Creek). Next, Hecla has stepped-up its exploration and pre-development efforts throughout its peer-leading portfolio of past-producing silver assets that guarantee Hecla's sustained presence as powerful force within the silver industry for many decades to come. Hecla has allocated $23 million toward pre-development activities at the former Star and Noonday mines in Idaho, the Bulldog and Equity mines in Colorado, and the San Sebastian project in Mexico. Hecla continues to enjoy substantial exploration success at each of these important properties and at its flagship mines as well.
Through all the adversity of Hecla's recent past, this company has continued to lay the groundwork for an exceptional growth trajectory to commence the moment Lucky Friday reopens in early 2013. Hecla is targeting organic production growth of 50% from next year's 10 million-ounce mark to reach 15 million ounces by 2017. As I mentioned in my recent discussion of Eldorado Gold (NYSE: EGO), I like to account for the unexpected when honing my own expectations for production growth, but I like Hecla's chances for at least reaching something close to that mark. That is why, despite the fact that my bullish CAPScall on Hecla from 2008 remains deep underwater today, the stock remains a top pick among my long-term silver favorites.
With more than $400 million in liquidity, furthermore, Hecla will have opportunities to secure additional growth through strategic acquisitions at some of the lowest per-ounce valuations we've seen in some time. With major miners Pan American Silver (Nasdaq: PAAS) and Coeur d'Alene Mines (NYSE: CDE) seemingly stalled near the 20 million-ounce zone, there may yet be time for Hecla to play catch-up and reclaim its historical position among the industry's elite producers. And that, in my view, is how Hecla is heading for higher heights.
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