Hecla Mining: A Silver Lining

07/28/2016 9:00 am EST


Jack Adamo

Editor, Jack Adamo's Insiders Plus

This recent new buy recommendation is a small US based miner; the company was founded in 1891 and is based in Coeur d'Alene, Idaho, explains Jack Adamo, editor of Insiders Plus.

Hecla Mining (HL) owns 100% interests in the Greens Creek mine in Southeastern Alaska; the Lucky Friday mine in the Coeur d'Alene district of Idaho; the Casa Berardi in northwestern Quebec, and the San Sebastian in Mexico.

Hecla had a great 1st quarter in the mines. Silver ounces produced were 61.3% higher year-over-year; gold production was 30% higher, while lead and zinc were up 11.7% and 7.9%.

Lower realized prices held back results somewhat; sales rose just 10%, but income from operations still soared 216%.

Despite these impressive numbers, the bottom line was disfigured by a huge swing in foreign exchange. Last year it provided a $12.3 million tailwind, whereas this year it was an $8.2 million headwind.

The result was a 92.6% drop in pre-tax income, which, combined with a higher tax rate, resulted in a very small loss, amounting to less than half a penny a share.

Taxable income and financial income are not calculated the same way, hence taxes may be higher, even though income is lower for financial reporting.

The silver lining here is that some of this drop is not reflected in cash flow, which was very positive despite start-up costs at San Sebastian as well as higher inventories and accounts receivable. The latter two should even out in the second quarter.

Interest coverage is good, toward the higher side for the industry, at 2.7x pre-tax earnings and the balance sheet is solid with total debt at 39.8% of capital. It was shored up a bit during the past year by a secondary stock offering that increased the float by 2.5%.

With a little luck, or better hedging of currencies, Hecla should do a lot better next year. Silver prices will probably rise at least incrementally, but more importantly, silver production is expected to rise 30% for the full year.

That should increase profits more than linearly, due to the leveraging effect of higher volume. I expect Hecla to at least double in the next three to five years and would not be surprised if it did much better than that.

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By Jack Adamo, Editor of Insiders Plus

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