What Does the Future Hold for Hecla Mining Company?

By Matthew DiLallo Markets Fool.com

Image source: Getty Images.

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Hecla Mining (NYSE: HL) has a long and illustrious history. Not only did the company just celebrate its 125th birthday, but it has been publicly traded on the New York Stock Exchange for more than 50 years, making it the oldest NYSE-listed precious metals mining company in North America. That said, as great as its past might have been, what has Hecla Mining most excited is what lies ahead.

Become the gold standard in precious metal stocks

Hecla Mining's strategy is to create value for investors on a per-share basis. To do so, the company has three long-term stretch goals, which it believes will take its value creation efforts to a whole new level:

  • Obtain an investment grade credit rating
  • Become listed on the S&P 500 Index
  • Lower its cost of capital to match industry leader Newmont Mining (NYSE: NEM).

The company has a long way to go before it will reach these goals. Currently, Hecla Mining's credit is deep into junk territory. Moody's for example, confirmed its B3 rating on the company's senior unsecured notes earlier this year and was followed shortly after that byS&P Global, which affirmed its B- rating on those same notes. These ratings kept the company's debt in a highly speculative territory, with both being six notches below investment grade.

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However, Hecla Mining has made tremendous progress to improve its balance sheet over the past year. Net debt to adjusted EBITDA has fallen 56%, going from 3.1 times to 1.4 times. Driving this improvement is the recent completion of several expansion projects as well as rising precious metal prices, which enabled the company to generate free cash flow and pay down debt.

Meanwhile, a listing on the S&P is somewhat beyond Hecla's control. One of the listing requirements is that the company has a market capitalization greater than or equal to $5.3 billion. That's well above Hecla's current market cap of $2.4 billion, suggesting it needs to do a lot of growing before it would even qualify for this listing. Just for perspective, S&P-listed Newmont Mining's current market value is $17 billion, which shows just how much smaller Hecla is when compared to an industry leader.

One of the reasons Hecla wants to earn an investment-grade rating and a listing on the S&P 500 is that these distinctions should help the company lower its cost of capital. Currently, its cost of capital is 8.4%, which is well above that of industry leader Newmont Mining's 4.8%. Because of this, Hecla Mining needs to earn a higher return on new investments than Newmont Mining to make an investment worthwhile. That's partially because the company pays higher interest rates on debt due to its junk rating and stock investors require higher returns due to its smaller size.

Image source: Getty Images.

Continue to grow production and value

Hecla knows it cannot accomplish those goals overnight and that growing for the sake of growth does not always create shareholder value. That is why its value creation strategy focuses on high-return projects to organically grow production. Since 2012, the company has experienced tremendous production growth, with silver output up 154% and gold production up 320%, enabling Hecla to achieve the highest silver equivalent production in its history this year. However, despite the recent output surge, the company still has plenty of growth left in the tank.

In the near term, the company's focus will be to expand production at its four operating mines. These include capturing productivity gains at Greens Creek, complete the no. 4 shaft project at Lucky Friday, finishthe East Mine Crown Pillar pit at Casa Berardi, and continue exploration drilling at San Sebastian. In addition, it has two longer-term mining projects under development: Montanore and Rock Creek. The company is currently working on permitting for both projects and likely will not start construction until early next decade. However, Hecla believes that these projects have the potential to create enormous value in the future.

For perspective, these two projects hold roughly half the resource potential as the Donlin Creek project that's currently under development by Barrick Gold (NYSE: ABX) and NovaGold Resources (NYSEMKT: NG). That's worth noting because analysts currently peg the value of Donlin Creek's resources at roughly $1 billion for Barrick Gold and NovaGold Resources. This valuation for a project with a similar development timeline as Hecla's two projects leads it to believe that it is sitting on a significant amount of unrealized value.

Investor takeaway

Hecla Mining wants to become one of the best mining companies in America and has a plan to get it to that point. That strategy includes improving its balance sheet and investing in high-return growth projects to grow the value of the company, which should earn it two key designations while lowering its cost of capital. The hope is that these initiatives should eventually push the legacy mining company toward the top of the heap, so it becomes a must-own mining stock for the long term.

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Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.