Hecla Mining: Good Prospects, But Wait For The Dip (NYSE:HL)
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A “Buy” Rating for Hecla Mining Company
Hecla Mining Company (NYSE:HL) is a silver and gold producer headquartered in Coeur d’Alene, Idaho, with mineral operations in the United States and Canada.
The company is 60 percent silver and 40 percent gold based on preliminary metal production and average market prices in Q2-2024.
Hecla Mining Company’s NYSE-listed shares are hereinafter referred to as “Hecla.” This stock receives a “Buy” rating based on this analysis, as expectations of “increased consolidated silver production” and higher prices mean that the market price of this stock has a good chance of rising in the coming months. However, investors may want to wait to implement the “Buy” rating, as this analysis also sees a dip in the share price as very possible. This, if exploited, can enable the stock to perform significantly better than buying shares at the upper end of the stock price cycle where they are still now.
The Market Likes Progress in Silver Production, and also Prices Strongly on the Way Up
According to “preliminary production for the second quarter of 2024” announced by the mining company on July 10, 2024, Hecla reported a 16.3% year-on-year increase in silver ounces to 4,458,484 ounces up from 3,832,559 in the prior year quarter, driven by record throughput at Lucky Friday in Idaho, improved throughput at Keno Hill in Yukon and solid performance at Greens Creek in Alaska. Hecla also has precious metal production at the Casa Berardi mine in Quebec, which instead deals with lower grades.
Production in terms of silver equivalent ounces grew at a visibly slower pace compared to the silver-only production jump on a year-on-year basis. The reason for this is a strengthening of the silver price per ounce versus the gold price per ounce on the market since the beginning of the year. Despite the practice of shifting the production of other metals to a specific metal production to get a better sense of the company’s overall growth, the stagnation in silver equivalents had no impact on the market value of Hecla shares. On the contrary, the stock performed very well because, to the market, Hecla is a silver company rather than a silver equivalent producer. Its stock was able to beat the majority of companies in the mining and exploration industry by squeezing the benefits of the bull market for precious metals, particularly silver, much more than the industry average.
Year-to-date, supported by an 18.02% rise in Silver Spot Price (XAGUSD:CUR) in the wake of a 15.94% rise in Gold Spot Price (XAUUSD:CUR), NYSE-listed shares of HL are up by 20.47%, more than the VanEck Gold Miners ETF (GDX) +19.37% at the time of writing.
GDX is the benchmark of the North American markets used by investors who focus on listed equities in the precious metals mining and exploration sector.
Source: Seeking Alpha
Commenting on the preliminary Q2-2024 production results, Cassie Boggs, interim president and CEO of Hecla, said:
“Hecla is on track to produce about 17 million ounces in 2024, a nearly 20% growth rate from 2023, making Hecla the fastest growing established silver producer with production growth in the best geographical regions.”
The CEO then draws the attention of financial markets to expected silver production in a range of 16.5 million to 17.5 million ounces for the full year 2024, although his company is also a good producer of gold, which is expected in a range of 121,000 to 133,000 ounces.
It is not a completely new fact that the stock market is particularly sensitive to silver production and rising silver prices. The positive effects on the share price have more than offset the headwinds from the gold business, which has not always run smoothly. Gold ounces rose 2% YoY to 37,324 in Q2-2024 from 36,592 in Q2-2023, while they fell 11.2% YoY to 35,251 in Q1-2024 from 39,717 in Q1-2023.
The YTD outperformance of the Hecla share price was helped by Hecla exceeding market forecasts for earnings and revenue underpinned by the favorable combination of the following catalysts. As the improvement in income is a major driver of share prices in the US stock market, upward catalysts have also worked diligently in this sense for Hecla’s NYSE-listed shares.
The Upside Catalysts For Hecla Mining So Far in 2024
In the spring, backed by solid momentum for gold prices posting their fifth straight weekly gain through April 19, “the metal’s longest winning streak since January 2023”, Silver’s price gains were “even hotter than gold”.
This trend in the relationship between silver and gold prices was attributed to the “traditional view” among market participants that “silver outperforms gold in a bull market,” said Philip Newman, CEO of Metals Focus. The price increases for silver and gold were as follows: at that time (April 17, 2024), front-month silver was up 14.3% compared to gold +6.9% over the first 17 days of April, and front-month silver was up 18.8% compared to gold +15% over the period from the beginning of 2024 to April 17, 2024.
According to Ole Hansen of Saxo Bank, the triggers for the bull market in the precious metal were geopolitical risks, but also rising debt-to-GDP ratios in the major economies, and inflation risks. These factors led central banks and many Chinese retail investors to use the precious metals as a safe haven. With an eye on the long run, if the aforementioned “traditional view” is correct, then the expected upward trend in the price of safe-haven gold will also continue to benefit the price of silver. At that time, the precious metal was seen bolstered by its traditional safe-haven qualities amid an economic downturn or even recession, with the Federal Reserve hawkish on interest rates, as David Meger of High Ridge Futures suggested, adding to the likelihood of cycle deterioration. On top of this, a rate cut, contrary to market participants’ sentiment, was not at all in the cards based on the analysts.
This is because as long as the Federal Reserve keeps interest rates high, neither consumption nor investment can stimulate economic recovery. The rationale is that consumption and investment must bear the brunt of a prudent monetary policy that signals to the various actors involved that there is a high risk in the economy that borrowers will not be able to meet their payment obligations.
Thus, a notable uptrend in precious metals, especially silver, in the first quarter of 2024 combined with improved consolidated silver production (4.19 million ounces in the first quarter of 2024 versus 4.04 million ounces in the first quarter of 2023) was more than enough in the eyes of the market to disregard the decline in gold production (36,592 ounces in the first quarter of 2024 versus 39,571 ounces in the first quarter of 2023).
On the other hand, as the company reached an inflection point in the first quarter, as CEO Phillips S. Baker Jr. stated, the lower grade of gold ore at Casa Berardi is believed to be something that can be easily overcome, while the most recent quarter-on-quarter trend in Greens Creek production reveals an Alaskan mine already in recovery mode.
Casa Berardi accounted for ≈60% of Hecla’s gold ounces. Greens Creek accounted for ≈59% of Hecla silver ounces and ≈40% of Hecla gold ounces.
Growth in consolidated silver ounces was supported by Lucky Friday finally reaching full production capacity following the successful completion of the ramp-up, as well as by the significant decrease in the All-Injury Frequency Rate (“AIFR”) and increased throughput at the Keno Hill mine.
Lucky Friday mine accounted for ≈25.3% of Hecla silver ounces. Keno Hill mine accounted for ≈15.4% of Hecla silver ounces.
Hecla Mining Exceeds Consensus on Sales and Earnings
The catalysts saw Hecla beat analysts on sales and earnings despite higher consolidated costs and lower sales on a year-on-year basis but with the latter two trends forgivable as production is just beginning a new upswing from the inflection point. Regarding costs, year-on-year: they were up 7.3% in terms of silver costs of sales to $108.2 million; they reported a 2.2-fold increase in cash costs after by-product credits to $4.78/oz; they were up 46.2% to All-in Sustaining Cost after by-product credits to $13.10/oz.
Hecla’s first quarter non-GAAP earnings per share (EPS) of $0.01 beat analyst consensus by $0.02, and Hecla’s first quarter revenue of $189.53 million (though down 5% year over year) beat analyst consensus by $1.39 million.
Adjusted EBITDA margin, a highly regarded measure by investors in capital-intensive industries such as mining, rose to 38.5% in Q1-2024, up from 31% in Q1-2023. The market welcomed these operational and financial results, which provided grounds to support the share price trading at levels not lower than $4.7/share, albeit through volatility, as it is anchored to the cyclicality of the precious metal price.
Hecla Continues to Receive Support from Bullish Silver, and Gold
Subsequently, Hecla shares continued to perform well in the stock market in the wake of the rally in the silver price, which supported by solid momentum in gold prices, rose to reach another “multi-year high” around May 20. The bull market in gold was fueled by Chinese investors flocking to safe havens to protect their portfolios from macroeconomic problems in China and the United States. In China, investors sought gold “amid the potential for a collapse in the Chinese yuan and local stocks” threatened by the “country’s persistently weak property market,” according to SP Angel analysts. As for the US, the Chinese investors instead bought the safe-haven gold to seek protection against the risk that the hawkish Fed (to curb elevated inflation) represented to an economy hugely burdened by public debt. Robert Crayfourd and Keith Watson, co-managers of the CQS Natural Resources Growth & Income fund said China was selling down US Treasuries. They said the Chinese central bank worked to reduce its US dollar reserves to invest in gold. From our perspective, it is understandable that the Chinese central bank could no longer be optimistic about the future of the US dollar, given the described gloomy outlook for the US economy. This rush to the safe haven took the form of a frenzy and also rubbed off on the interest of Western investors who had previously shown little enthusiasm for the precious metal for the purposes described.
Another bull market in precious metals helped HL shares rally sharply again in mid-July, amid expectations from analysts such as Citigroup Inc. (C) (CITI:CA) that once the Fed returns to a more dovish tone, it would send silver and gold prices higher through the end of the year.
The Outlook: Both Hecla Mining and Silver Price Target Long-Term Growth
If the traditional assumption that silver grows faster than gold during a bull market continues to hold true, not only does gold have a bright future (as a safe-haven investment against Fed tightening and geopolitical tensions threatening the economy), but silver also has a bright future ahead.
BMI, a subsidiary of Fitch Solutions, said last month that “gold prices will remain high in the coming years compared to pre-COVID-19 levels,”. In those days, an ounce changed hands for less than $1,600.
On June 27, Citigroup analysts said “they expect gold to reach $3,000/oz in the next 6-18 months”, while The Goldman Sachs Group, Inc. (GS) said the “price of gold could rise to around $2,700/oz by the end of the year”, but this is just a base case scenario.
Other gold market analysts argue that geopolitical tensions and current policies by the Fed and Western governments to combat inflation and in retaliation for Russia’s illegal war in Ukraine could even push the price of gold to the $3,000/oz mark in the coming years.
As for silver – gold’s less shiny cousin or poor man’s gold:
Michale DiRienzo, president and CEO of The Silver Institute said in June, “There is further room for gold prices to rise and silver prices will follow.”, and he added: “The future is bright for silver in terms of its use in green energy transition.”
Analyst Michael Widmer of the other US bank major Bank of America Corporation (BAC) said last month that he remains bullish on the second half of 2024 and into 2025, which is why he predicts silver will average $35/oz in 2026.
About Hecla Mining production: As shown in Hecla’s multi-year production outlook in the screenshot below, the future of Hecla’s production is going to be consistent with the sharp increase in precious metal prices. Following the positive inflection point hit in the first quarter of 2024, ounce volumes are expected to remain robust in the coming years. For silver production alone, this will translate into a respectable 20% year-on-year growth, as reflected in Hecla Mining’s CEO’s comments and previously mentioned in this analysis.
The company will draw ounces from silver reserves of 238 million ounces as of 2023, down from record silver reserves of 241 million ounces in 2022.
Source: Hecla Mining Company
What About Costs and Spending Power
The easing of inflationary pressure and the completion of some maintenance and rehabilitation projects are expected to reflect a slight improvement in costs compared to the trend in Q1-2024: For the full year 2024, the company thinks that the total cost of sales will be $382 million, while total cash costs, after by-product credits, per silver ounce will be in the range of $3 to $3.75, and AISC, after by-product credits, per silver ounce in the $13 to $14.50 range.
Capital expenditures will total $122 – $132 million in 2024, of which the majority (approximately 75-80%) will be allocated to Greens Creek’s equipment purchase and some capital development and to Lucky Friday to complete post-fire rehabilitation of the mine site. The growth capital will amount to $122 – $132 million, and the majority of it (approximately 75-80%) will be allocated to Casa Berardi, where the team is engaged in tailings construction activities, and Keno Hill, where the team is developing underground mining and for the purchase of mobile equipment. Plus, about $31.5 million will be used to target growth through exploration and pre-development activities.
Supported by positive sentiment regarding future cash flow on a rosy outlook for metal prices, production, and operating costs, the financial position to carry out maintenance and growth investments without undue hardships is on track for improvement with a net debt/adjusted EBITDA ratio from 2.7 times currently down to 2 times in 12 months.
The Stock Price: Wait for a Dip
At the time of writing, NYSE-listed shares of Hecla Mining Company were trading at $5.65/share, giving it a market capitalization of $3.54 billion. Shares traded above the MA Ribbon and were also much closer to the upper limit of the 52-week range of $3.33 to $6.35 than its lower limit. Shares, as illustrated in the chart below, are still trading at the upper end of the stock price cycle, even though they have retreated a bit recently.
Source: Seeking Alpha
The 14-day Relative Strength Indicator of 50.59 suggests that there is still room for shares to continue to pull back, providing a more comfortable level to buy shares. The catalysts to achieve the necessary negative pressure on the shares are described as follows.
While it can offer no guarantee of future results, the past is still very practical: Hecla shares formed 2 dips recently, in early May 2024 and early July 2024 on lower precious metal prices. Sentiment on the precious metals turned bearish as a result of Neel Tushar Kashkari, the president of the Federal Reserve Bank of Minneapolis, hawkish remarks in early May about the Fed’s next move on interest rates.
Also, when Fed Chairman Jerome Powell suggested in early July the need for greater confidence that inflation is returning to two percent before cutting interest rates, the U.S. dollar rose against other currencies, leading the Chinese to curb the purchases of gold. These hawkish remarks by Powell at the monetary policy panel debate at the European Central Bank’s conference in Portugal had likely hurt some interest rate traders’ hopes of a rate cut at the September meeting.
A strong US dollar affected overseas demand for the precious metal as the ounce which is priced in USD became more expensive for foreign investors. In terms of hopes for interest rate cuts in the September meeting, when these were dampened somewhat, the outlook for higher-for-longer interest rates was raised. This also depressed demand for gold as the opportunity cost of holding zero-yield bonds increased compared to U.S. Treasury bonds. As a result, Hecla shares experienced a downturn again and formed a new dip in the stock price in early July.
Given the above downside catalysts for Hecla Mining stock, a further decline may be imminent as explained ahead.
There are voices about the possibility of an interest rate cut already at the meeting in July. These voices, in our opinion, are too optimistic. Analysts at Citigroup Inc. (C) cite the weakening of the US labor market and a “general downward trend” in inflation as arguments.
The US core PCE price index – the Fed’s preferred inflation gauge – rose 0.2% month-on-month in June, while market expectations were for no more than a 0.1% jump. Also, the core indicator of annual PCE inflation remained at 2.6%. The release was thus inconsistent with market participants betting on the Fed cutting interest rates earlier rather than later this year.
As for the labor market, it’s still quite resilient: the system created 206,000 new nonfarm jobs in June, recovering from the 108,000 new jobs created in April 2024. This brings back to earth those who believed that the Fed was finally getting the signals its Chairman had hoped for. Also, the US unemployment rate rose from 4% in May 2024 to 4.1% in June 2024, and this is good for the Fed’s plan, but the rate is still too far below the long-term average of 5.7% for the US.
Neither labor market developments nor disinflation have recently performed in a way to sustain Citigroup’s arguments. Therefore, it is more likely that interest rates will remain at their current levels at the Fed meeting on July 31, and as was the case in early May and July, reinforced opportunity cost and U.S. dollar – both of which are considered enemies of precious metals – will put downward pressure on Hecla shares.
Conclusion
Hecla Mining Company is a silver and gold producer headquartered in Coeur d’Alene, Idaho, with mineral properties in the United States and Canada, implying a minimal risk based on the Sprott ESG Mining Risk Heat Map 2024.
An investment in shares of this company has a promising future as it has important upside catalysts on its side: a sustained uptrend in silver and gold prices and levels of solid production targeted in the coming years. Costs are on a trajectory to remain stable or improve slightly.
These factors led the company to beat expectations on earnings and revenue, helping share prices to get a ground floor lift.
The shares are not expensive relative to the growth prospects, but there could be an opportunity just around the corner to take advantage of a dip in the face of a wider return margin.