Hecla Mining: Best Valued Silver Producer

It is very hard to find a silver producer that is over 100 years old, has a balance sheet that includes 0 debt and $385 million of total cash, and is selling for around 14 times next year's conservative projected earnings.

Established in 1891 in northern Idaho's Silver Valley, Hecla Mining Company's (HL) rich history of mining has distinguished it as a respected precious metals producer. Hecla is the oldest U.S.-based precious metals mining company and the lowest-cost primary silver producer in North America. Now headquartered in Coeur d'Alene, Idaho, with a sister office in Vancouver, B.C., this international, publicly traded company is 117 years old.

Hecla recently announced its plan to acquire 100% of the fifth largest silver mine in the world – the Greens Creek mine in Alaska. Upon closing, the transaction will nearly double Hecla's annual silver production to approximately 11million ounces, while further decreasing its already low cash costs per ounce of production.

In 2007, Hecla was the lowest-cost primary silver producer in North America, producing 5.6 million ounces of silver at an average total cash cost of negative $2.81 per ounce. Hecla also produced 107,708 ounces of gold. The company has exploration properties and operating mines in five world-class silver and gold mining districts in the U.S., Venezuela and Mexico. Hecla's proven operating expertise, recent acquisitions, low-cost growth profile and excellent exploration potential emphasizes Hecla's position as a the low-cost, low-risk silver investment.

Hecla mines, processes and explores for silver and gold in Idaho, Colorado, Mexico and Venezuela. Hecla currently produces silver from two silver mines, Greens Creek and Lucky Friday, as well as mining gold at the La Camorra Unit in Venezuela. In 2007, the Greens Creek mine in Alaska contributed 2.6 million ounces of silver to Hecla's account, and the Lucky Friday mine in northern Idaho produced 3.0 million ounces. The La Camorra Unit in Venezuela produced 87,490 ounces of gold in 2007.

Hecla has long been well known in the United States as a quality producer of silver and gold. The name "Hecla" is commonly associated with both precious metals by investors. Hecla's common stock has been traded on the New York Stock Exchange for over 40 years under the symbol "HL."

So this is a company with a trailing-twelve-month profit margin growth of 28% and operating margins of 28%, and its year-over-year quarterly earnings growth was around 90%.

On Feb. 13, 2008 HL CEO Phil Baker Jr. told a conference that his company is trying hard to complete the acquisition of Greens Creek so they can own 100% of this bonanza.

"It took 20 years," said Baker, but "once Rio Tinto (NYSE:RTP) did the Alcan transaction we went into high gear to be able to pick up [Greens Creek]. Baker added, "We know the operation intimately and believe the operational risks are low."

"The cash cost per ounce of silver produced at Greens Creek, including byproduct credits, is among the lowest in North America."

Based on recent prices for metals, Hecla should recoup the $750 million purchase price within 5 to 6 years, and could potentially do so sooner if prices continue to improve. And according to CEO Baker, Greens Creek will generate large volumes of free cash. The estimates are $150 million to $200 million annually after taxes.

So the possibility for HL to pay some dividends and/or make some more accretive acquisitions is tremendous with this kind of scenario. Great revenues and cash flow enable Hecla to expand other operations, as well.

In addition to consolidating ownership at Greens Creek, Hecla is upgrading operations at its properties in Idaho's Silver Valley. And I'm told Hecla is adding a former Colorado mine to its portfolio. They recently annouced a deal to earn up to a 70% j.venture interest in San Juan Silver Mining Venture in the Creede mining district in Colorado.

Through this they will be gaining access to a 48 million ounce silver resource, based on initial assessments. There is probably even more silver resource out there. The land package includes the old Bulldog mine of the former Homestake Mining Co.

So is there much downside to HL? My best estimate would be that if gold and silver prices drop 10% (which is entirely possible) over the summer months HL could dip down near $8 a share (which is not likely but also is possible).

If that happens, I, who already own a nice position, will be backing up the truck to complete my purchases to make Hecla one of the largest single positions in my portfolio.

Don't believe me though, do your own due diligence. Start at their user-friendly web site which I'll post in a moment, and notice they do have an Environment Policy.

That web address is http://www.hecla-mining.com/index.html. I think you might also want to look at their "Key Statistics" on the Yahoo Finance site to gain a quick overview of their financial condition and balance sheet.

By the way back on April 16th they announced they completed the acquisition of of Greens Creek from Rio Tinto. I'll conclude with quotes from that announcement.

As a result of the transaction, Hecla subsidiaries now hold 100% of the Greens Creek joint venture, which is believed to be the fifth largest silver mine in the world in terms of annual production. Hecla has held a 29.73% interest in Greens Creek for the past two decades. On an annualized basis, by 2009 the integration of the rest of the Greens Creek mine into Hecla is expected to:

• nearly double Hecla's silver production to about 11 million ounces annually
• increase silver reserves by more than 150%
• increase gold reserves by 140%
• significantly increase Hecla's cash flow from operations
• decrease Hecla's already-low average cash costs per ounce of silver

Hecla's President and Chief Executive Officer Phillips S. Baker, Jr., said, "We think the Greens Creek mine and its 12-square-mile land package is an exceptional asset, with great low-cost, long-lived production, as well as tremendous upside exploration potential.

This asset transforms our company and provides us a solid base for additional growth well into the future." The acquisition is accretive to Hecla on important major operating and financial metrics, including production, cash costs per ounce, cash flow and silver, gold, zinc and lead reserves. As a result, Hecla has increased its production guidance for 2008 to approximately 9 million ounces of silver. Hecla's cash costs remain among the lowest of the North American primary silver producing companies, and in 2007 the average total cash cost was negative $2.81 per ounce of silver.

The $750 million purchase price consisted of $700 million in cash and $50 million in Hecla common stock. Hecla funded the cash portion of the payment with approximately $340 million from its existing cash and the remainder was funded through a $380 million debt facility provided by Scotia Capital.

The debt facility includes a $140 million three-year amortizing term facility and a $240 million bridge facility (of which Hecla drew $220 million at closing), which matures in six months. Baker said, "Our Greens Creek and Lucky Friday silver mines generate a great deal of cash flow at current metals prices, which is expected to enable us to pay off the debt in less than three years.

We have organized this financing to include a bridge facility that allowed us to eliminate a bank requirement to hedge a portion of our future zinc and lead production, and therefore avoid the earnings volatility associated with mark-to-market accounting. Over the course of the next several months, we will be evaluating various opportunities to retire the bridge loan."

Baker concluded, "As a participant in the Greens Creek joint venture for 20 years, Hecla has first-hand knowledge of its great value. Frankly, we have been trying to acquire Rio Tinto's interest for many years. I could not be more pleased with this transaction and am excited about what it means for our shareholders and for our company's future."

Disclosure: Long

Comments

[hatlau]

HL has a history decreasing mineral production over the year. The revenue gain all came from incrase in commodity price. So I don't see why would anyone invest in HL before they invest in the commodity itself?

[TexasBob]

As to the comment by "Hat", do the math. Greens Creek is the 5th largest mine in the world and will provide the necessary cash flow for other acquisitions. Buying the commodity silver is fine, providing you take possession, however when it is time to cash in, it is a lot easier to sell your stock with a click of the mouse, than try to dispose of a physical commodity.

[LarryH]

I would rather have the silver in hand than own any potential in the ground.

[Georealist]

Silver in the hand people never tell you the negatives...so how about these...
1. Silver is heavy and a pain to lug around..it takes up a fairly substantial amount of storage space in a home safe..keeping it in a safety deposit box in any substantial quantity is ridiculous...
2. It has...AND I MEAN MOST SALEABLE PHYSICAL FORMS...large transaction cots..roundtrip you'll be giving up a minimum of 15%. Junk silver is not the easiest to market to a dealer..and some don't even want to be bothered...
3. Simply getting physical silver from a dealer as promised has become a hassle....
I bought my first physical silver over 30 years ago...and I've heard every lunatic barter based argument for owning the stuff in hand...and its crap! If it comes to bartering start stocking up Jack Daniels..and a very good pistol.
HL is a solid silver play..I personally like CDE better because I'm convinced it has the greatest upside potential of ANY mineing company that is already developing in the world.....

[buyitcheap]

Would Venezuelan nationalization of Hecla's facilities provide a nice entry point? I'd sell there immediately.

[Zee]

I like HL stock and have for decades, but one has to buy and sell at the right times. For those who want physical silver, check the numbers. From the lows of the late 90s to early 2000s, HL stock has increased by more than ten times; silver has increased by about five to six times. I like to have a combination of physical silver and solid silver stocks. I have bought and sold both, and the I agree that selling by a click of the mouse is faster than a phone call with a commodity broker, I do not find it much of an inconvenience, especially when the multiples are up to 5 times. For those who do not like silver in the ground, that is too bad. Check the performance of SSRI from about 1995 to date. SSRI doesn't produce any silver, yet!

[ritam18]

According to the IR people at HL, the exposure to VZ is minimal: VZ revenue is only 3% of total HL revenue. So no big deal if they get nationalized.
BTW, the best performing newsletter over a 5 yr. period is Outstanding Investments, and in late April they said "Buy HL up to $15". It is a great company for the long term.

[Skeptik]

According to Resourcestockguide.com data First Majestic Silver Corp and Silverstone Resources Corp are cheaper and have no exposure to base metals

[aurum.thought]

Mining is in the pits, considering the high cost of transportation and its extreme effect on the environment. Why would I invest in an open pit mine that is polluting Alaska for personal gain? The only thing going for it is low property values, and there is potential growth... but at what cost?

[pansyed]

to Aurum.though. Whats the alternative to mining? Do we say we do not want to drive cars, have computers, cell phones and all the modern usage of gold and silver?

Environmental pressures are being placed and steadily increased on mining companies. Over my lifetime we have gone from mine and leave to the use of reclaiming and water treatment. Thats progress.

But taking your argument farther should we also say no more development of cities - they encroach on nature and create probably far more environmental damage. There is and will be an ever better balance.

I think it is better that mining should take place where there is an environmental conscience. Should we mine at a third world site where the conscience is considerably less?

[sieraromero]

CDE has more long term upside potential, in my opinion and is or will be shortly 1 of the lowest cost per ounce producers.

[SWRichmond]

I own Hecla and also plan to own CDE. Physical silver is also a good buy. Silver for the individual investor in 1 ounce coins, 10 ounce or 100-ounce bars, is starting to be hard to find. Until recently this was not the case. Round trip spreads (less shipping of course) on 10 ounce bars at a reputable dealer like APMEX are still under 5%
www.apmex.com/Product/...

and on 100 ounce bars the spread is just over 4%
www.apmex.com/Product/...

Shipping and insurance costs will add a few percent.

I encourage everyone to own some physical. It takes metal off the market, where it can't be duplicated as paper silver (contracts, derivatives, etc etc etc.)

Physical PM's in your possession are the ONLY world-recognized portable store of wealth that does not represent someone else's obligation or promise; they can't be defaulted. Think about that. Hard.

If you encounter a dealer whose spread is 15% just politely leave. Do your own research, there are groups and forums available where you can find out who is a hassle and who isn't. There are plenty of reputable and hassle-free dealers.

[ritam18]

HL is now down to $8.50; are metals and commodities going to crash in price for awhile?
Outstanding Investments, an Agora Financial newsletter, featured HL as a buy up to $15 in their May newsletter, and that was when the price was $11.32. They say that HL will hit $30 in 18 months. (The newsletter was rated the top newsletter over a 5 year period by Hulbert Financial Digest.)
They mine silver as a byproduct of gold, so the mining costs per ounce are a MINUS $2+ per oz..... they are the lowest cost producer of silver in the world........
It seems to be just below the $8.80-$8.90 support now..... Is the price drop just a seasonal thing?
anyone have current thoughts on this?

[maelstrom]

Great comments all..I was a silver bug some years ago and accumulated 70lbs.. sat around till I sold it at no real profit because silver was stationary @ $6,00 oz. for so many years. These are different times Coinage is the way to go if you can find it at a low premium. I switched to gold and silver bars from the top refiners their Hallmarks are universally respected and are only a few points over the metal price if you buy a fair amount

[Plantinseeds]

I prefer to mine my own silver and gold. When I 1st started I was shocked at where all the "free" places were. Its also great weekend entertainment for the family. 2nd thing I learned is don't tell anyone where it is :)

HL and CDE are both good investments for paper metals.

Currently holding 49.223 ounces of unrefined gold and 1092.077 ounces of silver. Holding securley is not that big a deal.
Not bad for a 9 year hobby.

[silveraxis]

I don't know about $30, but this is clearly a $20 stock just to get to the same peer valuation as PAAS and SLW (since both have declined recently, the $20 is probably more like $17). The negative cash cost for silver is from zinc and lead, not just gold, so there is some exposure to base metals. But forgetting gold and base metals completely, the stock is still arguably undervalued based on projected silver production alone: 11 million oz. x $15 = $165 million x 10X revenue multiple (minimum for PAAS/SLW) = $1.65 billion / 123 million shares = $13.41/share. Of course, this excludes the $700 million cash purchase component of Greens Creek and explains why the shares are down around $8 currently. To wit, if Hecla were to issue shares to fund the purchase at $10/share (not likely, but a distinct possibility and it would certainly not happen at a lower price than that), then it would be $1.65 billion / 203 million shares = $8.12/share. As it stands, the plan appears to be the use of short to medium term financing to be repaid from operating cash flow. Regarding Venezuela, there must be some mistake as in 2007 La Camorra represented 30% of sales but was actually operated at a loss. The 3% probably refers to gross profit contribution, which is an entirely different thing.