Sunday, March 14, 2010

Hecla Mining: At 119 Years Old Producing Record Cash Flow!

Last Friday, we discussed the magnificent earnings results starting to be recorded by the major precious metals miners Goldcorp (GG), Newmont Mining, (NM), and American Barrick (ABX)( and how this is so bullish for the mining sector.

However, phenomenal results have been delivered by the juniors as well.  In today's piece, we're going to take a look at a junior silver miner not only hitting a home run in operations, but attractively priced to give investors some major potential upside.

First a disclosure:  I currently own a position in Hecla Mining Company (HL).  Having said that, I own this position for very good reasons.

Hecla Mining Company (HL) was established in 1891 in northern Idaho's Silver Valley, making it the oldest U.S.-based precious metals mining company in North America and the largest producer of silver in the U.S. Headquartered in Coeur d’Alene, Idaho, this international, publicly traded company is 119 years old.

Hecla mines, processes or explores for silver and gold in the U.S. and Mexico.  The company currently produces silver from two silver mines, Greens Creek and Lucky Friday.  In 2009, the Greens Creek mine in Alaska, which is the sixth largest silver mine in the world, produced 7.5 million ounces of silver; the Lucky Friday mine in northern Idaho produced 3.5 million ounces.  Hecla has two development projects, San Juan Silver in Colorado and San Sebastian near Durango, Mexico.

Approximately 70% of the Greens Creek Mine was acquired from Rio Tinto in April, 2008, for $750 million.  The size of the acquisition, coupled with the timing, nearly brought Hecla to insolvency.  The purchase closely coincided with the peak in precious metals prices and the subsequent freeze in capital markets resulting from the financial meltdown in late summer and fall 2008.  As a result, Hecla was forced to sell stock at extremely depressed levels to raise cash - creating substantial dilution just as operations were hammered by falling Silver and Gold prices.

In the 6-month period from late April 2008 to November 2008, the company's stock fell by a mind-numbing 90% to a low of $1.40.  As operations suffered and capital markets were inaccessible, repayment of the bank debt taken out to complete the deal with Rio Tinto was in substantial doubt.

Since then, Hecla has staged an incredible turnaround and is now poised to handsomely reward shareholders.

Results for full year 2009 were nothing short of stellar.  Operating cash flow was an all-time record of $115 million.  Silver production came in at 10.9 million ounces - a 26% increase over 2008.  Gold production increased to more than 67,000 ounces.

More importantly, the Company reduced cash costs 55% to $1.91 per ounce from the prior year.  As a result, Hecla's net income increased to $54.2 million, the third highest in Hecla's history.  Revenues were $313 million - an all-time annual record.

As a result, the Company was able to repay $161.7 million of bank debt taken on in the acquisition of Green's Creek and establish a new $60 million credit facility.

In the fourth quarter of 2009, Hecla recorded a gross profit of $36 million, the second highest quarter in Hecla's history.  Net income came in at $0.11 per diluted share.  Annualized, this would give Hecla a very attractive Price to Earning Ratio (P/E) of about 12-13, given the closing price of the stock on Friday of $5.50.

Hecla Mining is one of the most attractive junior producers and has virtually no geo-political risk given its operations in Idaho and Alaska.  Given its still very attractive price, which is still less than half its $12 peak in 2008, this company should be considered in any portfolio of junior Gold and Silver miners.

Marko's Take

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