As gold and silver prices trend higher, I am renewing focus on some quality stocks in the precious metals industry. Not just because the near-term trend is likely to be bullish but because gold and silver have long-term upside.
This article will discuss Hecla Mining (HL, Financial), which looks promising as a value creator in the long term. In the last year, Hecla Mining has moved higher by 78%, but there is significant upside in the coming years.
Hecla Mining is the largest primary silver producer in the U.S. with four operating North American mines and a number of exploration properties and predevelopment projects.
As of fiscal 2016, the company’s diversified revenue stream consisted of 39% revenue from silver production, 39% from gold, 13% from zinc and 9% from lead.
Strong growth and fundamentals
For fiscal 2015, Hecla Mining reported revenue of $444 million and for fiscal 2016, the company’s revenue surged by 45% to $646 million. For the same period, the company’s operating cash flow surged from $106 million to $225 million.
An important point to note here is that the company’s LTM fourth-quarter 2016 leverage declined to 1.2 from 3.0 for LTM first-quarter 2016. With swelling EBITDA and improving cash flows, the company’s credit metrics have seen good improvement and give Hecla Mining high financial flexibility for growth in the foreseeable future.
As of December 2016, Hecla Mining had cash of $199 milion and $100 million in undrawn credit facility. Considering fiscal 2017 operating cash flow to be the same as fiscal 2016 operating cash flow of $225 million, Hecla Mining is fully funded for capital expenditure for the next 24 months. I do expect the company to accelerate investments if gold and silver prices remain firm, and this will help the stock trend higher.
Attractive cash margin
I mentioned above that even if Hecla Mining reports the same cash flow in fiscal 2017 as fiscal 2016, the company is fully funded for investments for the next 24 months. It is therefore important to talk about the company’s cash margin for gold and silver (the key cash flow drivers).
For fourth-quarter 2016, Hecla Mining reported realized silver price of $16.59 and an appealing cash margin of $14.95. For the same period, the company’s realized gold price was $1,202 per ounce with cash margin of $402 an ounce.
With attractive cash margin, I expect higher cash flows in the coming years with the assumption that gold and silver prices trend higher (very likely). Further, with strong financial muscles, the company’s production will improve and that will add to the cash flows.
Shareholder value creation
Hecla Mining has a clear strategy on shareholder value creation. I expect share re-rating in the coming years on robust dividends and potential share buybacks.
Hecla Mining mentions in its latest shareholder presentation that it aims to create shareholder value through dividends and buybacks. This point is worth discussing because the company reported free cash flow of $44 million in fiscal 2016.
With a strong liquidity buffer, growth projects in the pipeline and firm prices for precious metals, I expect free cash flow to swell and as dividends grow, the stock is likely to grab investor attention.
With lower net debt and strong cash buffer, another potential source of value creation that the company aims for is inorganic growth. If precious metal prices sustain at higher levels, I expect acquisitions to boost production growth.
Conclusion
Hecla Mining has ambitious long-term plans for growth, and the company aims for investment grade rating and Standard & Poor's 500 listing. While it might be too early to talk about this, Hecla Mining has shown in the past that the company has the ability to exceute projects and deliver robust cash margin.
With my bullish view on precious metals, I expect Hecla Mining to be a long-term value creator. At current levels, the stock is worth considering and can be a potential portfolio catalyst in the next few years.
Disclosure: No positions in the stock.
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