This week, we delve into the commodities world to focus on a long-standing, exceptional mining company who currently ranks as the largest primary silver producer in the United States. Hecla Mining Company has been in business since 1891, and in recent years, has procured quality mining properties with high grade ores that have allowed the company to produce silver at a lower cost per ounce than many of its peers. The B3/B rated medium term bonds from Hecla are currently indicating a yield to maturity of nearly 9%. Over the past three years, Hecla has increased silver production by an impressive 142%, while at the same time increasing its margins. Its #4 Shaft Project, which is slated to come online in early 2017, will increase Hecla’s annual silver production by a whopping 60%. Currently trading at a nine point discount and about 9% YTM, these 70 month bonds are couponed at 6.875% and represent a good opportunity for added diversification to within the mining sector. Therefore, we have targeted these bonds for addition to our FX1 and FX2 high yield global income portfolios.
About the Issuer
Established in 1891, Hecla Mining Company (NYSE: HL) is headquartered in Coeur d’Alene, Idaho, with a sister office in Vancouver, B.C. Hecla Mining is the largest primary silver producer in the U.S. and one of the lowest-cost producers, as well as a growing gold producer. The Company owns two primary silver mines in Alaska (Greens Creek) and Idaho (Lucky Friday) and the Casa Berardi gold mine in Quebec. Expected 2015 silver production is 10.5 million ounces with expected gold production of 185,000 ounces. Not only is Hecla is the number one producer of silver in the United States, it is also the number three producer of lead and zinc in the U.S.
In addition to its diversified silver and gold operating and cash-flow generating base, Hecla has a number of exploration properties and pre-development projects in five world-class silver and gold mining districts in North America. With an active exploration and development program, the company has consistently grown its reserve base for future production, with 2015 reserves totaling 173 million ounces of silver (up 239% over 2006 levels) and 2.1 million ounces of gold reserves.
In its most recent reported quarterly results, Hecla’s revenues were split between the following metals- 36% gold, 37% silver, 16% zinc, and 11% lead.
Hecla Mining has continued to grow its production. For Q1 2015, production at the company’s Greens Creek mine in Alaska increased 14%, and production at the Lucky Friday mine increased 20% over the same time period for 2014. Overall, silver production increased by 16% year-over-year in Q1 2015. In addition, since 2012, the company’s silver equivalent production has increased a whopping 142%.
Within the next few years, Hecla will add production from two very lucrative mines in its developing portfolio – the San Sebastian mine in Durango,Mexico and the #4 Shaft Project, an expansion at its already operational Lucky Friday Mine in Idaho.
The mine at San Sebastian is a familiar one since Hecla operated the underground San Sebastian mine on this property from 2001-2005. The company is in the process of expanding its mining activities there to take advantage of recently discovered high-grade mineralization located within 100 meters of the surface. Due to its previous mining experience at San Sebastian, Hecla has all needed permits to move forward mining the newly discovered silver deposits. They are anticipating production to begin within the next twelve months. Hecla projects that San Sebastian can easily generate $30 million in free cash flow with less than $10 million needed in capital spending.
On the heels of San Sebastian becoming operational, the company’s #4 Shaft Projects at its Lucky Friday Mine will be next in line to begin production. This project is currently 80% complete and estimates indicate that it will add 5 million silver ounces per year in production, increasing Hecla’s annual production by an impressive 60%. More importantly, is that this growth will come as a result of higher grades rather than additional tonnage, which means cash costs per silver ounce should decline. Hecla anticipates the #4 Shaft Project will be completed in the first half of 2017.
Finally, in June 2015, Hecla Mining completed its acquisition of Revett Mining Company. The big win with the Revett acquisition is access to the Rock Creek Project (Montana) which is considered to be one of the largest, undeveloped silver and copper deposits in North America. The Rock Creek complex contains an eye-popping 229 million ounces of silver and 2.02 billion pounds of copper in inferred resources.
Hecla has secured its short, medium and long term growth with San Sebastian, #4 Shaft Project and the Rock Creek Project, respectively. This positions the company not only for near-term success, but to be a viable and profitable mining company for many years to come.
Decreasing Costs and Improving Margins
In 2014, Helca’s silver cash costs (after by-product credits) per ounce of silver were significantly lower as compared to the average of certain silver producing peers (Pan American, Silver Standard, Endeavour Silver, First Majestic Silver, and Couer Mining). When compared to these peers, Hecla’s cost per ounce registered $4.81 versus $11.83 for this peer group. Cash cost per ounce at the company’s Greens Creek Mine were equally impressive in 2014, at $2.89 per ounce. In Q1 2015, the company’s cash cost per ounce declined 22% year-over-year, going from $4.93 per ounce to $3.83 per ounce.
Logically, as cash costs per ounce have decreased, margins have increased. In 2013, the margins on its silver production were 68%. In 2014, this grew to 74%.
Solid Revenue Growth
In addition to decreasing its costs and improving its margins, over the past three years, Hecla Mining has continued to post revenue increases.
Excellent Liquidity Levels
As of 3/31/2015, Hecla Mining had cash on hand of $196 million with an additional $100 million credit facility, for a total liquidity of $296 million.
Forecasted Growth – Silver and Gold
Prices for both silver and gold, the two biggest revenue generators for Hecla Mining, have declined over the past twelve months, gold by 12.6% and silver by 26.9%. However, prices seem to be stabilizing within the last six months, with gold down only 1.94% and silver down only 1.25%. The sustained decline in the price of gold over the past few years has forced many gold miners to pull back production. However, gold demand has continued to increase. According to the World Gold Council, gold demand is expected to come in between 4,100 and 4,200 tons in 2015, an increase over 2014 demand. However, gold production is increasing at a lesser pace when compared to demand. This demand-supply gap could lead to improvements in gold pricing, especially considering gold demand in markets such as Asia and India.
A similar trend can be seen in the silver market as well. A Kitco News report cites silver scrap supply, which was 259 million ounces in 2011 is slated to drop to 155 million ounces this year. The silver market is also expected to register a deficit this year of 11 million ounces, down from a small surplus in 2014 of 3 million ounces. HSBC cites these reasons for its target price range for silver this year of $15.25 to $21.25 per ounce in 2015. These favorable demand-supply dynamics will lead to improved pricing for silver and ultimately translate to increased revenues and profits for Helca.
The default risk is Hecla Mining’s ability to perform. The company has continued to increase its production of not only silver, but gold, zinc and lead as well. Hecla has done an outstanding job of staging upcoming producing mines in San Sebastian, the #4 Shaft Project at Lucky Friday and the long-term play at Rock Creek. When combining this with increasing margins and decreasing cash costs, the attractive 8% yield of these bonds appears to significantly outweigh its ability to perform risk.
As a majority of Hecla’s revenues are from its sales of silver and gold, the company is exposed to volatility in the prices of these commodities on the open market. The prices of silver and gold do appear to have stabilized in the past six months, and it is also encouraging that over 25% of Hecla’s revenues (in Q1 2015) are from the sale of zinc and lead, providing some measure of revenue diversification.
Mining is a heavily regulated industry from an environmental standpoint. Hecla, like many mining companies, has been subject in the past to judgments that have resulted in the company paying fines to the U.S. Environmental Protection Agency. Payment of these fines could have an impact on future profitability.
These excellent, 8% yielding, 2021 Hecla Mining bonds appear to have similar yields, risks and maturities to other bond issues reviewed on the Bond-Yields.com blog, specifically, 8.1% Japfa Comfeed, 10.6% Fortescue Metals Group, and 9.18% Parker Drilling.
Summary and Conclusion
Hecla Mining has continued to increase its revenues, reserves and margins. Furthermore, the company appears to have intelligently positioned itself for growth in the short, medium and long term with its development of its mining pipeline. With the company continuing to mine higher grade ores, we also think its cash costs per ounce will continue to decrease, increasing margins and profits. Therefore, we see these nearly 9% yielding, medium-term bonds providing both good cash flow and excellent diversification, and have marked them for addition to our Fixed-Income1.com and Fixed-Income2.com global high yeild portfolios.
Issuer: Helcla Mining Company
Yield to Maturity: ~8.99%
Disclosure: Some Durig Capital clients may currently own these Helcla Mining 2021 bonds.
Please note that all yield and price indications are shown from the time of our research. Our reports are never an offer to buy or sell any security. We are not a broker/dealer, and reports are intended for distribution to our clients. As a result of our institutional association, we frequently obtain better yield/price executions for our clients than is initially indicated in our reports. We welcome inquiries from other advisors that may also be interested in our work and the possibilities of achieving higher yields for retail clients.
To know more about this Hecla bond call our fixed income specialist at 971-327-8847