Founded in 1891, Hecla Mining (NYSE: HL) is the oldest operating precious metals producer in the United States and the largest domestic producer of silver. That last stat may be surprising considering a labor dispute knocked its prized silver mine offline in March of last year. That resulted in a nasty year-over-year swing in profitability, from net income of $69 million in 2016 to a net loss of $23 million in 2017.
While the setback may have been at least partially management's fault, the executive team has hit the ground running in 2018 as it looks to regain the trust of investors and improve operations. That effort includes a $31 million loan from a Canadian mining group and a massive $462 million acquisition of several gold mines in Nevada. Shares have yet to respond and are down 33% in the last year. Should opportunistic investors consider Hecla Mining a buy?
Continue Reading Below
By the numbers
Striking workers at the company's Lucky Friday mine made 2017 anything but lucky for Hecla Mining. The company's performance deteriorated from the year-ago period on almost every metric.
Despite the sour comparison to the prior year, it should be noted that revenue of $578 million in 2017 was still higher than the annual totals achieved in the recent past. Even a net loss of $23 million wasn't its worst in the past five years.
Unfortunately, not all of Hecla Mining's operating woes in 2017 stem from Lucky Friday. Operating income fell at three of the company's four mines compared to 2016. That said, aside from Lucky Friday, all mines posted higher operating income last year than in 2015, but the inconsistency has been frustrating for shareholders.
That explains two recent moves by Hecla Mining's management team. First, the company announced an investment from Ressources Quebec, although it's really a loan for $31.6 million to help fund expansions at the Casa Berardi mine in Quebec. It's the company's second-largest mine by revenue, but was the least profitable last year save for Lucky Friday. Nonetheless, the relatively low-interest loan from a committed stakeholder saves cash on hand and averts the need for dilution.
The biggest recent news came in March when Hecla Mining announced it would be acquiring Klondex Mines for $462 million. The deal will add three American gold mines to the portfolio in an attempt to grow the business and mitigate falling production from existing mines. Meanwhile, the Canadian assets of Klondex Mines will be spun out as a new company.
Wall Street sent Hecla Mining shares down over 10% the day the deal was announced. Analysts had good reasons to do so. The $462 million acquisition price comes with the option for Klondex shareholders to receive cash for each share they own or a prorated number of Hecla Mining shares. Considering the company ended 2017 with $227 million in cash, cash equivalents, and investments, it would need to take on debt to manage the former option. The latter option would dilute existing shareholders. Does it project to be worth the risk?
Well, the three American mines acquired in the deal -- Fire Creek, Midas, and Hollister -- would have boosted Hecla Mining's 2017 production by 27%, or 162,000 gold equivalent ounces per year. The mines post healthy profits and cash flow. They also boast a geology (narrow-veined underground mines) that the new parent company is an expert in exploiting. In fact, the company's current asset portfolio includes previously acquired mines that were brought up to speed over time.
While the major acquisition could eventually provide a boost shareholders, a lack of available details right now makes it difficult to assess the impact of the transaction. How long will it take for the new mines to payback the acquisition price? Will the debt or dilution be worth it? What level of capital expenditures is needed to explore and possibly develop expansions at the new mines (a key consideration in the acquisition)? There are more questions than answers, which is a recurring theme of late for Hecla Mining.
Pass on this gold and silver stock
In a word, Hecla Mining is complicated. The stock is distressed from recent events, but there are multiple (and potentially significant) potential catalysts within reach. Settling the labor dispute at Lucky Friday and bringing the mine back on line would be a boon to shareholders. Meanwhile, the major acquisition of Klondex Mines provides the potential for production growth and higher earnings.
The problem facing investors right now is that there's a high degree of uncertainty facing the business. Three of the company's four mines delivered lower operating profits in 2017 than in 2016, which shows that Lucky Friday isn't entirely to blame for the stock's slide. There's no timeline for when the ongoing labor dispute will be settled. And there aren't many concrete details on the complete impact of the recent acquisition.
Uncertainty is a stock's worst enemy, and right now Hecla Mining is facing a lot of uncertainty. Therefore, I would pass on this gold miner until there's more clarity about the near- and long-term direction of the company.
10 stocks we like better than Hecla MiningWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Hecla Mining wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of April 2, 2018