Hecla Mining Co. (HL, Financial) seems to have hit the bottom because the 14-day Relative Strength Indicator is 29 out of a historical 30 to 70 range, indicating that the stock may have reached oversold levels.
The share price of $2.22 at close Tuesday is the result of a 44% drop in the market value of Hecla Mining Co. for the 52 weeks through Nov. 13. Also, the share price at close Tuesday is just 5 cents above the 52-week low of $2.17 and nearly 110% from the 52-week high of $4.63.
The below chart powered by GuruFocus portrays the trend in Hecla Mining Co. on the New York Stock Exchange over the last 52 weeks of trading. The chart is illustrating that the share price at close Tuesday is well below the 50-, 100- and 200-day simple moving average lines. The stock has a market capitalization of approximately $1.07 billion.
The price-book ratio is 0.62 compared to an industry median of 1.74, and the EV-Ebitda ratio is 8.26 versus an industry median of 9.3.
There is no doubt that Hecla Mining Co. is trading cheaply as of Nov. 13, but I would not buy shares of this precious metal producer today for several reasons.
First, the market value of Hecla Mining Co. is particularly susceptible to dips in the price of gold. This means that when the price of the yellow metal decreases, the share price of this precious metal producer tends to decline more than proportionally. Since gold and silver are seen not to take off at least through the end of 2018, Hecla Mining Co. should behave accordingly on the stock market with a share price that will not move significantly above $2.22, or may plunge even further if the commodity sinks.
Gold and silver are plummeting. The yellow metal is down 8.2% to $1,202.1 per troy ounce and the grey metal is down 15.6% to $14.02 per troy ounce on average since the beginning of 2018.
Second, the company presents some operational issues consisting of lower ore grades and milled tonnage as a result of mine sequencing at the Greens Creek Mine in Alaska. These operating issues, which have already influenced the results of the third quarter of 2018, seem as though they can extend until the last trimester of 2018, with subsequent consequences on the market value of the stock.
Problems at Greens Creek Mine resulted in a 24% year-over-year decrease in the production of silver to 2,523,691 ounces and in a GAAP loss of 5 cents per share, missing consensus on the bottom line by 4 cents. Following the miss on the bottom line, the share price fell over 5%.
The company is also engaged in exploration and production of gold and base metals. The production and sale of silver accounted for 25-27% of total sales revenue, gold about 56-58%, and lead and zinc 15%.
The production of gold increased 16% to 72,995 ounces thanks to the addition of production from Nevada operations acquired on July 20.
Third, lower metal prices have a strong impact on the generation of profit at Hecla Mining Co. since the miner is a high operating cost leverage producer. This means that if the precious metal does not trade high enough to cover the fixed cost per unit of metal produced, Hecla Mining will incur a loss or a decreased adjusted Ebitda.
This is what we can see when the third quarter of 2018 is compared to the same period of 2017: Despite a 2% year-over-year increase in sales revenue to $143.65 million in the third trimester of 2018, the sharp decline in the price of gold and silver per ounce of metal sold contributed to a harsh 33.3% slide in the adjusted Ebitda of $40.33 million. However, the miner has also missed consensus on third-quarter sales revenue by $19.87 million.
In the third quarter of 2018 the average realized price per ounce of gold sold decreased 6% to $1,205 and of silver sold declined 14% to $14.68 from the third quarter of 2017.
Therefore, with gold and silver on track to remain below the averages of $1,225 and $14.55 per troy ounce for the remainder part of 2018, the high operating cost leverage structure of Hecla Mining Co. is an additional reason to defer a buying approach.
For full-year 2018, the miner estimates silver equivalent production ranging between 37.9 million and 40.2 million ounces and gold equivalent production of 540,000 to 565,000 ounces. The company wishes to reach those levels of equivalent gold and silver output with the production from the Greens Creek mine in Alaska, the Lucky Friday mine in Idaho, the San Sebastian mine in Mexico, the Casa Berardi mine in Quebec and Nevada Operations.
As of Sept. 30, the company has approximately $60.86 million in cash on hand and short-term investments in securities, which represents a 72.3% decrease from Dec. 31, 2017. The company has also a line of credit of $250 million and long-term total debts of about $534.1 million.
The company is paying an annual dividend of 1 cent, equally distributed over the four quarters, which lead to a forward dividend yield of 0.41% as of Nov. 13.
As per November’s estimates, seven analysts out of a total of 11 recommend holding Hecla Mining Co,, one analyst foresees an underperforming stock and only three analysts recommend adding the stock to any position.
Analysts on average believe the stock will hit $3.95 per share within the next 52 weeks of trading, reflecting nearly 78% growth from the market value at close Tuesday.
For the reasons described, I estimate the odds of such appreciation to be small. Therefore, I would consider softening my position if I were an investor.
Disclosure: I have no positions in any securities mentioned in this article.
