Hecla Mining: A Mixed Bag (NYSE:HL)

(Source: Hecla Mining – Image: Lucky Friday Mine)

Investment Thesis

The Idaho-based Hecla Mining (HL) is considered a “silver” stock, but in fact, the production of gold is the primary component for the miner now, with 57.1K Au Oz this quarter.

Note: Zinc and lead production above is what has been sold.

The company released its first quarter of 2020 results on May 7, 2020. Production and revenues were significantly down due to mine shutdowns related to the COVID-19 pandemic.

This situation may impact the second quarter as well. After an adverse reaction, the market started to buy back Hecla Mining stock looking in the second half of 2020, which is supposed to be much better.

HL is slightly outperforming the VanEck Vectors Gold Miners (NYSEARCA:GDX).

ChartData by YCharts

The investment thesis is getting more difficult now. I find the stock price a bit overbought probably due to the strong momentum experienced recently with the gold price. I believe the best strategy here is to keep a core position long term, hoping for a better H2 2020 and trade short term around 50% of your HL position.

The CEO, Phil Baker, said it quite simply on the conference call:

Gold production is highlighted in gold and estimated to be lower because of Casa Berardi being idle for almost a month and then we need about a month to rate [ph] above the full production. The change in production is also due to the virus having a month and a half to two months’ impact.

Company Balance Sheet And Production In 1Q 2020 – The Raw Numbers

Hecla Mining 4Q’18 1Q’19 2Q’19 3Q’19 4Q’19 1Q’20
Sale Revenue and others in $ million 140.17 158.65 144.08 163.88 224.95 136.93
Net Income in $ million -23.83 -25.67 -46.67 -19.65 -8.11 -17.32
EBITDA $ million 14.11 18.18 4.18 42.87 64.04 39.69
EPS diluted in $/share -0.05 -0.05 -0.10 -0.04 -0.02 -0.03
Cash from operating activities in $ million 19.0 20.0 -11.3 54.9 57.26 4.93
Capital Expenditure in $ million 53.6 33.1 38.2 26.1 24.1 19.9
Free Cash Flow In $ million -34.6 -13.0 -49.5 28.8 33.17 -14.94
Total cash $ million 27.4 11.8 9.4 33.0 62.45 215.52
LT Debt in $ million 532.8 533.7 586.7 584.6 504.73 679.02
Dividend per share in $ 0.0025 0.0025 0.0025 0.0025 0.0025 0.0025
Shares outstanding (diluted) in a million 481.1 482.8 486.1 490.0 502.90 523.22
Silver and Gold Production 4Q’18 1Q’19 2Q’19 3Q’19 4Q’19 1Q’20
Silver Production K Au Oz 2715 2923 3018 3293 3412 3245
Gold production K Ag Oz 71.0 60.0 58.4 77.3 74.8 58.8
Silver realized $/oz 14.58 15.70 15.01 17.02 17.47 14.48
AISC by-product 11.44 9.34 11.16 8.8 10.13 11.06

Data Source: Company release and Morningstar

Silver And Gold Production Details For The First Quarter Of 2020

1 – Total Silver/Gold production

Total production for the first quarter of 2020 was 3,245,469 Ag oz, and 58,792 Au oz for silver and gold, respectively. It was up 11.1% for silver and down 2% for gold compared to the same quarter a year ago. Production below per mine. Green Creek is the more significant mine producer for the company, while Lucky Friday is slowly ramping up.

Source: Presentation

2 – Silver price and AISC by-product is $11.06/Ag Oz

The silver price was down 3.5% from the same quarter a year ago, and AISC (by-product) went up from $9.34 last year to $11.06 this quarter. AISC gold was $1,302 per ounce.

Source: Presentation

Financial Snapshot

1 – Total Revenue was a record of $136.93 million in 1Q’20. Revenues were $136.93 million in 1Q’20, down 10.3% from a year ago, and down 39.1% sequentially. Hecla Mining reported a first quarter loss of $17.323 million or 0.03 per share, compared to a loss of $25.671 million in the same period a year earlier, or $0.05 per share. Revenues were negatively impacted by mine shutdowns related to COVID-19 (e.g., Casa Berardi in Quebec, and San Sebastian in Mexico) and bad timing in the silver sale.

2 – Free Cash Flow was a loss of $14.9 million in 1Q’20. The generic free cash flow is the cash from operating activities minus CapEx.

It is an excellent financial indicator that I always indicate in my analysis. For Hecla Mining, it shows a mixed bag, perhaps because the company has a large production of silver that has not performed well.

Free cash flow yearly is now a loss of $2.5 million, with a loss of $14.9 million this quarter.

The company is paying a dividend of $0.01 per share annually, or 0.3% yield, which is very low but still too high based on free cash flow.

3 – The net debt is $463.3 million in 1Q’20.

The company indicated $215.715 million in total cash. Net debt is now about $463.3 million. The total debt includes $469.021 million in senior notes and $210 million drawn on the revolving credit facility.

The company issued $475 million of senior notes due in 2028, replacing $506.5 million senior notes due in 2021, reducing long-term debt, and extending its maturity.

Hecla had adjusted EBITDA of $37.8 million, net debt/adjusted EBITDA (last 12 months) of 2.5x.

Lindsay Hall said in the conference call:

we started the year with $62 million of cash and no revolver balance outstanding. In end of the quarter with some $5 million of net cash balance. We used $31 million to reduce leverage as we repaid $506 million of the outstanding bonds, with that and we issued new $475 million bond. In addition we incurred fees in conjunction with refinancing of some $5.5 million plus another $3 million in doubling up our one month of interest expense due to the refinancing.

4 – 2020 Production Outlook and other (reinstated)

From Presentation

5 – Lucky Friday: Ongoing production ramp-up

Union workers at Lucky Friday ratified the collective bargaining agreement early this year. Lindsay Hall said in the conference call:

[T]he cost related to the restart activities amounted to $6.3 million which is in line with our expectations. These costs respectively will be [indiscernible] with the associated increase in revenues as the mine progresses the full production later in the year. We’re very pleased the strike is over and we can anticipate better performance in 2021 as opposed to the negative cash flows, we’ve been experiencing with the mine being on strike for last two years.

Source: Presentation

Conclusion And Technical Analysis

Hecla Mining delivered a weak quarter, and the company missed analysts’ expectations. Despite this production setback due mainly to the COVID-19 pandemic, which has affected the Casa Berardi and San Sebastian mines, the market has been buying the stock significantly.

The issue is that the second quarter will not be stellar either, and progress will be seen toward the end of 2020.

The logical conclusion is that the stock looks overbought now and could eventually retrace if the gold price turns temporarily bearish while the world economy tries a comeback.

Thus, it is perhaps a great time to sell a part of your position and wait for a meaningful retracement to buy back the stock.

Technical Analysis (Short Term)

HL is forming an ascending wedge pattern, which is generally bearish. It means the pattern will likely end with a support breakout and retest of lower support, which is the 50MA. RSI also indicates a divergence, which is a sell signal.

Line resistance is now $3.65, and line support is $3.25 getting closer.

The short-term strategy is to sell at resistance and buy back at support. I recommend accumulating below $3, assuming a retest of lower support at $2.55, depending on the price of gold.

However, if gold continues its positive momentum, there is a remote chance that HL can reach $4.25.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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