As Hecla Mining (NYSE:HL) continues to recover from the severe hangover that resulted from the forced closure of the Lucky Friday mine last year, silver investors eager to catch a dashing bargain may well be inclined to roll the dice for a luckier road ahead.
But a careful look at Hecla's fourth-quarter and 2012 earnings, released Monday, suggest that Hecla may not have rolled a lucky seven quite yet. Hecla's headline cash costs for silver production reliably count among the lowest in the industry, and the Greens Creek mine in Alaska came through again during 2012 with an average cost of $2.70 for each of the 6.4 million ounces of silver produced (after by-product credits). As mining investors have learned all too well in recent years, however, those alluring cash cost figures often provide a rather rosy view of underlying cost structures and comprehensive total returns.
Don't get me wrong: Hecla Mining is a formidable mine operator with one of the world's truly outstanding silver mines at Greens Creek. The fact that Hecla enjoyed $190.9 million in by-product credits from gold, lead, and zinc production during 2012 -- representing 59.4% of the company's overall revenue stream -- is a testament to the incredible mineral wealth that resides within Hecla's flagship asset. But during this critical transition year, while Hecla works to progress Lucky Friday toward full production volumes by the second half of the year, I encourage investors to maintain their focus on the bottom line rather than Hecla's amazing cash costs.
Don't overlook the bottom line
I find it of far greater relevance to investors, for example, that Hecla's consolidated net income per ounce of silver produced fell from $15.92 per ounce during 2011, to just $2.25 per ounce during 2012. Tallying the shaft remediation work at Lucky Friday, and elevated (though important) expenditures of $49.7 million for exploration and pre-development, it's not hard to see where most of that difference originated. But with another large exploration and pre-development budget on tap for 2013 ($51.5 million), I expect 2013 to yield a similarly wide gap between by-product cash margins per ounce and bottom-line net income per ounce. Moreover, with acutely elevated cash costs projected during the initial ramp-up at Lucky Friday -- averaging about $17 per ounce during the first half before settling down toward $9.50 during the second half -- even Hecla's peer-crushing cash cost will approach $5 per ounce for the year.
From a long-term perspective, as I have repeatedly proposed, the dramatic retreat in Hecla's shares do indeed present a fascinating opportunity to invest in a miner that already possesses sufficient mineral wealth to sustain its historical position among the world's major primary producers of silver. A decade from now, I feel confident that today's share price will be seen to have offered quite a lucrative proposition.
But for silver investors forced to base their investment decisions in the here and now, not even the welcome return to production at Lucky Friday can suffice render Hecla a top choice among a field of similarly battered silver mining stocks at the present time. Endeavour Silver (NYSE:EXK) continues to offer a clearly superior outlook for shareholder returns in the medium term, and may be the greatest bargain I've seen in silver since the depths of the 2008 financial crisis. First Majestic Silver (NYSE:AG) -- my top pick in silver for 2013 -- recently declined to enter a bidding war with Coeur d'Alene Mines (NYSE:CDE) over Orko Silver's La Preciosa deposit. And yet, the market continues to treat this top-notch operator with disdain. It's worth noting that First Majestic delivered an exceptional net profit margin of 37.8% through the first nine months of 2012. Both Alexco Resource (NYSEMKT:AXU) and Fortuna Silver Mines, likewise, look to me to offer far greater upside potential than Hecla at this time.
I do expect to increase my holding in Hecla Mining to create a core long-term position, but something tells me I may be doing so with some of the nearer-term gains from one or more of Hecla's competitors mentioned above.