Despite strong Q3 output, Hecla Mining misses expectations

Hecla Mining reported Wednesday that “all three of our mines performed strongly in the third quarter, leading to higher production over the entire suit of metals we produce”.

During a conference call with analysts Wednesday, Hecla CEO Phil Baker observed, “The production increases come in times of volatility and low silver prices and we are fortunate to have several competitive advantages to reduce that volatility and deal with the low silver prices. For example, because of our low cash cost after by-product credits, our high-quality assets are not very price-sensitive.

“Another advantage is that we produce large amounts of four metals. The prices of gold and silver are weaker, but the prices of lead and zinc are stronger giving us a natural revenue hedge,” he added. “We also hedge a portion of our lead and zinc production, cushioning us further against price volatility.”

Hecla Mining

During Q3 Hecla reported silver equivalent production of 7.7 million ounces (239 tonnes) and 22.6 million SEO (684 t) for the first nine months of 2014. Total silver production increased 25% in Q3 to 2.9 million ounces (90 t) at a cash cost after by-product credits of $5.43 per ounce, compared to production of 2.3 million ounces (71 t) of silver for Q3 of last year at a cash cost of $7.43/oz.

For the first nine months of this year, Hecla reported 7.88 million ounces ( 254 t) of silver output at a cash cost, after by-product credits of $4.90/oz, up 22% from 6.43 million ounces of silver (199 t) at $6.65/oz for the same period of 2013.

Hecla also reported gold production of 42,501 ounces (one tonne) during the third quarter of this year at a cash cost, after by-product credits, of $898/oz, up 15% from 36,966 ounces (one tonne) at $1,066/oz during Q3 2013.

For the first nine months of this year, Hecla reported 132,323 ounces (4 t) of gold production at a cash cost, after by-product credits, of $911/oz, up 82% from production of 72,881 ounces (2 t) at $1,086/oz for the same period of last year.

The company also produced 30,468 tons (27,640 t) of lead and 50,750 tons (46,039 t) of zinc during the first nine months of the year, up from 21,027 tons of lead (19,075 t) and 44,990 tons (40,814 t) of zinc for the first nine months of 2013.

This year’s guidance remains unchanged at 9.5 million to 10 million ounces of silver and 180,000 gold ounces at cash costs of $5 per silver ounce and $900/oz for gold.

During the conference call, Baker highlighted the company’s San Sebastian project in Mexico because, he said, it’s looking like it could become a producing mine. “We believe that San Sebastian is a district that, over time, will ultimately have more than 100 million silver equivalent ounces,” said Baker.

When asked by analyst John Bridges of J.P. Morgan “How quickly could you get this thing moving?” Baker responded that it would take a couple of years to construct a mill. “So nothing could occur immediately but this would probably be a relatively low capital project; something less than a $100 million.”

Hecla operated the underground San Sebastian mine from 2001-2005, producing about 25 million SEO.

“We have on the books, at the beginning of the year, silver equivalent of about 55-60 million ounces. So we are saying we think that the property will ultimately be over 100 million ounces from where we are starting right now. Stay tuned on what the specific capital will be and what the operating cost will be,” said Baker.

When asked by analyst David Deterding of Wells Fargo regarding “any thoughts we might see if we see silver prices stay in this $15-$16 range for the next 12 plus months?”, Baker responded, “I think it puts a lot of pressure on the development capital for a number of mines. So what ends up happening is, yes, they are able to operate and they are able to stay in business for the next year, two years, but they just get way behind on development and they sort of put themselves where they cannot complete their mine plans.

“And that’s where we really have the opportunity, with the cash flow that our mines generate, we will be able to work our way through that price environment. And coming out the other side, we would be in a position to put capital into those mines that are trouble. So we just see it as a great place to be,” Baker stressed.

“With respect to what we think about the supply-demand fundamentals for silver over the next five years, it’s extraordinarily good, from the standpoints that there are so many new applications that are consuming silver. And those new applications are being applied to significantly more people,” Baker observed.

Hecla Mining

“You have got 300-400 million people in China whose lifestyle is very similar to the lifestyle in the Western world and the people in the Western world consume roughly 4/10 of an ounce of silver per annum. And so the outlook for silver seems to us to be very good. And it will continue beyond that five-year timeframe,” he stressed.

Financials

Despite Baker’s optimism, Hecla missed adjusted Q3 net income expectations. While the company reported net income applicable to shareholders of $3.5 million or 1 cent per basic share for the third quarter, up from a loss of $8.46 million or 3-cents per share in the third-quarter 2013, adjusted net income was a loss of $2.1 million or one-cent per share, which was slightly below consensus of a one-cent gain per share for the Q3 2014.

For the first nine months of this year, Hecla reported a net income of $505 million or one cent per share, compared to a net loss of $22.6 million or 7-cents per share for the first nine months of last year.

Adjusted net income for the first nine months of this year was $61 million, compared to an adjusted loss of $12.3 million or 4-cents per share for the same period of 2013.

Scotiabank analyst Trevor Turnbull maintained Hecla’s “Sector Perform” rating as the company’s production profile “is expected to be relatively flat until Lucky Friday reaches higher-grade material in 2017; however, we note the positive exposure to rising lead and zinc prices.” The target is US$3 per share.

Cowen and Company’s Adam P. Graf observed, “Mines are operationally cash flow positive, but the company remains free-cash flow negative. Production and cost guidance remains intact, and capital programs are moving along.” He maintains a “Market Perform” rating.

Nevertheless, shares of Hecla Mining hit a new 52-week low of $2/sh during trading on the NYSE Wednesday, closing at $2.04 with a volume of 15,429,070 shares traded.