Hecla Mining: Earnings Growth Expected To Accelerate In FY2020 (NYSE:HL)

We’re now more than halfway through the Q2 Earnings Season for the Silver Miners Index (SIL), and one of the most recent names to report its earnings is Hecla Mining (HL). While COVID-19 related closures hit most of the sector, Hecla’s primary mines were barely affected, which allowed the company to post 10% growth in silver production year-over-year, with gold production in the period relatively flat. This incremental increase in output combined with higher metals prices drove both margin expansion and higher revenue, helping to push earnings estimates higher over the past couple of weeks. However, with the stock up 375% in less than 110 trading days, the stock is getting a little extended and is no longer undervalued. Therefore, I see better opportunities elsewhere in the sector for the time being.

(Source: Company Presentation)

Hecla Mining released its Q2 results last week and reported quarterly gold production of 3.4~ million silver ounces and gold production of 60,000 ounces. This translated to a more than 10% increase in silver production year-over-year, with the company benefiting from its US-based mines being able to operate without much interruption. At the same time, most of the silver miners were slapped with government-mandated closures in South America and Mexico. These solid operating results allowed Hecla to generate double-digit revenue growth and a massive improvement in free cash flow year-over-year. Let’s take a closer look at the results below:

(Source: Author’s Chart)

(Source: Author’s Chart)

As we can see from the chart above, silver production has steadily trended higher over the past two years, with the recent increase helped by the 2-year strike finally coming to an end in Q1. During the quarter, the mine saw a massive bump in production to 470,000~ ounces of silver, up 170% from 174,000~ ounces produced in Q2 2019. While the company was up against very easy year-over-year comps due to union workers being on strike, this is still an impressive result considering the unprecedented challenges posed by mining in a COVID-19 world. As noted in the company’s release, the hope is to ramp up to full production by year-end, which should be a significant benefit to Hecla’s production profile.

(Source: Company Presentation)

Meanwhile, despite 7-day isolation at the company’s flagship Greens Creek Mine in Alaska, silver production was higher year-over-year to 2.8 million ounces, benefiting from much higher grades (15.56 ounces per tonne silver vs. 14.36 ounces per tonne silver). However, all-in sustaining costs increased year-over-year to $7.11/oz due to higher treatment costs and lower base metal credits. While this represented a 15% increase in costs from the year-ago period, it’s worth noting that these costs are still exceptional and well below the industry average, which is closer to $11.50/oz.

(Source: Author’s Chart)

On a consolidated cost basis, all-in sustaining costs improved from $11.16/oz to $9.33/oz, and higher metals prices drove further gains in all-in sustaining cost margins. As the above chart shows, the all-in sustaining cost margin for Q2 2020 was $9.11/oz, up from $3.85/oz in the year-ago period. Based on my estimates for costs below $11.00/oz in Q3 and an average realized silver price above $22.00/oz, I believe Hecla should be able to post a new multi-year high in all-in sustaining cost margins this coming quarter. This would be a bullish development fundamentally as rising earnings estimates combined with a multi-year high in margins is a recipe for a great growth story ahead. Let’s take a look at the company’s growth metrics below:

(Source: YCharts.com, Author’s Chart)

As we can see from Hecla’s earnings trend above, annual earnings per share [EPS] has made no progress in the past several years, with the Lucky Friday strike and lower metals prices contributing to net losses per share in FY2018 and FY2019. However, given the recent strike resolution and improved metals prices, analysts are now forecasting that annual EPS will flip back to positive in FY2020, with estimates currently sitting at $0.03. While this pales compared to where we sat in FY2016, the real earnings growth should show up next year.

(Source: YCharts.com, Author’s Chart)

If we take a look at FY2021 annual EPS estimates, we’ve seen them ratcheted higher over the past month, and they’re now sitting at $0.18, and they look quite conservative if silver stays above $24.00/oz. Assuming Hecla can meet or beat these estimates, this would translate to 500% growth in annual EPS year-over-year, and one of the highest growth rates in the sector. While this is partially due to being up against very easy year-over-year comps and a dismal earnings trend for the past decade, it is certainly a step in the right direction.

(Source: YCharts.com, Author’s Chart)

Moving over to quarterly revenues, we also see a significant improvement here, as quarterly revenue increased by 24% year-over-year to $166.4 million despite COVID-19 headwinds. However, if we look ahead to the Q3 estimates, they’re expected to trend higher in a big way to $189.9 million, given the higher metals and ramp-up at Lucky Friday in Idaho. This would translate to 18% revenue growth year-over-year and push the two-quarter average revenue growth rate to 21%, a 1,400 basis point sequential improvement. Given that we’re seeing sales growth come in at high double-digit levels, this confirms the turnaround in Hecla Mining and completes the growth story. While a trend higher in annual EPS is very suspect when revenue growth is weak, and there’s no margin expansion, Hecla ticks all the boxes with all-in sustaining margins set to hit a new high in Q3, and revenue growth accelerating.

So, why not pay up for the stock here above $6.50?

While the fundamental thesis for Hecla has improved immensely with the strike ending and silver exploding higher, Hecla is now a little overvalued relative to its peers and is a little extended technically. As the chart below shows, Hecla is currently trading at a forward P/E ratio of 42.4, nearly double the peer average forward P/E ratio of 25.0. Within this peer group is the industry-leading Pan American Silver (PAAS) trading at just 21.3x forward earnings, so it’s hard to justify paying above 42x forward earnings for Hecla. Some investors will argue that Hecla has safer jurisdictions which should command a premium multiple, and this is absolutely true. Still, I believe Pan American makes up for this with its long-term track record, higher margins, and larger and more diverse production profile.

(Source: Koyfin.com)

If we take a look at the technical picture, we’ve also got the stock quite overbought short term as it’s sitting more than 70% above its 300-day moving average (blue line). Typically, this is a very tricky spot for stocks of all sizes, and this suggests the reward to risk is no longer favorable for entering new positions above $6.65. This does not mean that Hecla has to suffer a large correction or that the stock is going to top here, it merely means that there is an elevated risk of this with the stock nearing its most overbought levels since Q3 2016. Ultimately, the market will go where it goes, but I have never found it wise to buy stocks up 375% in just over 100 trading days as Hecla is currently.

(Source: TC2000.com)

Hecla Mining had a solid Q2 operationally, and we are finally seeing the first signs of a fundamental turnaround here with Lucky Friday ramping up, margins improving, and the company putting a dent in its long-term debt last quarter. However, at over 42x forward earnings and with the stock the most extended it’s been in years, I believe investors would be wise to wait for a more attractive entry and not pay up for the stock above $6.65. For now, I continue to see more attractive opportunities elsewhere in the sector among the higher-margin producers with more attractive valuations like Pan American Silver.

Disclosure: I am/we are long PAAS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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