"What are your thoughts on Hecla Mining (HL)? I bought it at $2.98 and I'm curious how long you feel I should hold it."
Introduction
The first thing you want to notice for Hecla Mining is its correlation to a specific index (this part is relatively obvious, but nevertheless important to the price performance of Hecla). As seen by the price below, the stock (blue line) follows the prices of gold (orange line) and silver (red line) much more closely than the S&P 500 index (green line). I would estimate that, at least in the short- to medium-term, 80-90% of Hecla’s price performance will be due to the price performance of gold and silver. With inflation at historical lows and worldwide economic concerns dampening, the appeal of gold among investors is minimal. The remainder of this report will follow the 10-20% of value that the company provides aside from the direct prices of gold and silver.
The first thing you want to notice for Hecla Mining is its correlation to a specific index (this part is relatively obvious, but nevertheless important to the price performance of Hecla). As seen by the price below, the stock (blue line) follows the prices of gold (orange line) and silver (red line) much more closely than the S&P 500 index (green line). I would estimate that, at least in the short- to medium-term, 80-90% of Hecla’s price performance will be due to the price performance of gold and silver. With inflation at historical lows and worldwide economic concerns dampening, the appeal of gold among investors is minimal. The remainder of this report will follow the 10-20% of value that the company provides aside from the direct prices of gold and silver.
Revenue Estimates
Hecla’s company projected 2014 silver production is 9.5 to 10 million ounces and 180k ounces of gold. This equates to between $185 million and $195 million in base silver revenue and over $231 million in base gold revenue (based on current market prices). These numbers alone total between $416 and $426 in revenue. However, the analyst-estimated total revenue for the current year (2014) is about $506 million. This difference comes from what Hecla calls “by-product credits”. Hecla (and other miners) realize by-product credits when they mine something they didn’t consider to be their primary target. This can be copper, zinc, lead, or even gold. They then deduct the sales value of the by-product from the cost of mining their primary target (in this case, silver), to get their cash cost of mining after by-product credits. Because these by-products are commodities, their values (and in effect the company’s forward revenue estimates) can be computed with relative ease. I calculated that the correlation coefficient (Pearson’s r) between the by-product credit and the average annual price of copper to be 0.77. Knowing this (and that copper is the largest by-product of silver mining), we see that a significant portion of Hecla’s revenue will come from the price of copper. Given copper’s YTD performance, that’s bad news for Hecla.
The Supply Chain
Hecla’s company projected 2014 silver production is 9.5 to 10 million ounces and 180k ounces of gold. This equates to between $185 million and $195 million in base silver revenue and over $231 million in base gold revenue (based on current market prices). These numbers alone total between $416 and $426 in revenue. However, the analyst-estimated total revenue for the current year (2014) is about $506 million. This difference comes from what Hecla calls “by-product credits”. Hecla (and other miners) realize by-product credits when they mine something they didn’t consider to be their primary target. This can be copper, zinc, lead, or even gold. They then deduct the sales value of the by-product from the cost of mining their primary target (in this case, silver), to get their cash cost of mining after by-product credits. Because these by-products are commodities, their values (and in effect the company’s forward revenue estimates) can be computed with relative ease. I calculated that the correlation coefficient (Pearson’s r) between the by-product credit and the average annual price of copper to be 0.77. Knowing this (and that copper is the largest by-product of silver mining), we see that a significant portion of Hecla’s revenue will come from the price of copper. Given copper’s YTD performance, that’s bad news for Hecla.
The Supply Chain
Source: IBIS World
Based on the chart above, the demand industries are flagging, the key economic drivers are unfavorable, and supply industry prices are increasing. This is the picture any analyst will see when they look at Hecla or any similar gold/silver mining company. So, given this information, is the company trading at attractive valuations to be considered a “cheap” buy? Based on its 3-year average P/S ratio and current sales (revenue) per share of 1.19, the stock is trading at a 30% discount. However, when compared to other companies within the same industry, Hecla trades at a significant premium. The P/S ratios of Hecla and other companies within the industry diverged starting in May 2012. However, the P/S ratios have begun to converge again starting at the beginning of last year, possibly suggesting diminished stock performance even with above-average earnings reports.
Conclusion/Suggestions
Hecla Mining Company’s YTD underperformance versus gold prices and slight outperformance versus silver prices gives a mixed message, especially when compared to other companies within the industry. For short-term trading, it is best to buy HL when the stock is trading at a significant discount to the 3-month price performance of both gold and silver. For longer-term investing, I recommend selling HL as its valuation continues to come back in-line with the industry average of paying about $1.50 for each dollar of sales (P/S ratio). If you’re looking for exposure to the possible recovery of gold/silver miners, I would look to Barrick, Goldcorp or Newmont. If you’re simply looking for exposure to the possible recovery of gold or silver, buy a gold or silver ETF (GLD or SLV, respectively).
Extra: See if you notice the error in the company's investor fact sheet
Hecla Mining Company’s YTD underperformance versus gold prices and slight outperformance versus silver prices gives a mixed message, especially when compared to other companies within the industry. For short-term trading, it is best to buy HL when the stock is trading at a significant discount to the 3-month price performance of both gold and silver. For longer-term investing, I recommend selling HL as its valuation continues to come back in-line with the industry average of paying about $1.50 for each dollar of sales (P/S ratio). If you’re looking for exposure to the possible recovery of gold/silver miners, I would look to Barrick, Goldcorp or Newmont. If you’re simply looking for exposure to the possible recovery of gold or silver, buy a gold or silver ETF (GLD or SLV, respectively).
Extra: See if you notice the error in the company's investor fact sheet
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