Hecla Mining Q1 earnings: Inflationary pressures hurt bottom line (NYSE: HL)

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Introduction

Idaho-based Hecla Mining (NYSE: HL) produces about one-third of all silver made in the United States. The company released its first quarter 2022 results on May 10, 2022.

Note: This article is an update of my article published on February 25, 2022.

1 – Overview of 1Q22 results

Hecla Mining reported that the company produced 3,325,000 Ag Oz and 41,642 Au Oz in the first quarter of 2022. Revenue was $186.50 million.

The company’s silver mines reported a total cost of sales of $78.9 million. The cash cost and AISC per silver ounce (on a byproduct basis) were $1.09 and $7.64, respectively.

All of the Company’s mines generated positive free cash flow despite inflationary cost pressures, slow supply chains and remaining COVID-19 related labor disruptions.

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HL: Q1 2022 Highlights (Hecla Mining)

Hecla President and CEO Phillips S. Baker, Jr. said on the conference call:

we operate in the best jurisdictions in the world, including the United States and Canada. And if you look at the specific states and provinces we’re in, the Fraser Institute ranks them all in the top 10 regions for investment. And we’re not just in those places. We are the largest silver mine in the United States, producing approximately 40% of all silver mined, and we are also a major gold producer in Quebec.

Stock market performance

HL significantly underperformed the VanEck Vectors Gold Miners ETF (GDX) and iShares Silver Trust (SLV) on a year-over-year basis. Hecla Mining is down 37%.

Chart
Data by Y-Charts

Investment thesis

I still view HL as a potential long term investment in gold and silver.

The company is not my favorite in this segment. Still, I see some potential, especially after the sharp drop in stock prices, which offers a great opportunity to build a safe long-term position. An important plus point is the location of the assets.

However, as I said in my previous article, the company is small and has recurring technical weaknesses. Inflationary pressure is a problem, but metal by-products (lead and zinc) offset its damaging effect.

Thus, I suggest trading LIFO HL short using at least 40% of your total position – more details at the end of this article.

Hecla Mining – 1Q22 Balance Sheet and Company Production – The Raw Numbers

Hecla Mining 1Q21 2Q21 3Q21 4Q21 1Q22
Sales revenue and others in millions of dollars 210.85 217.98 193.56 185.08 186.50
Net profit in millions of dollars 18.97 0.79 -0.98 11.88 4.15
EBITDA millions of dollars 83.90 54.79 46.64 29.54 55.49*
Diluted EPS in $/share 0.03 0.00 0.00 0.00 0.01
Cash flow from operating activities in millions of dollars 37.94 86.30 42.74 53.36 37.91
Capital expenditures in millions of dollars 9:41 p.m. 31.90 26.90 28.84 9:48 p.m.
Free cash flow In millions of dollars 16.52 54.41 15.84 24.52 4:43 p.m.
Total cash in millions of dollars 139.75 181.49 190.90 210.01 212.03
Long-term debt in millions of dollars 507.99 508.61 507.71 508.10 508.85
Dividend per share in $ 0.011 0.011 0.00625 0.00625 0.00625
Shares outstanding (diluted) in millions 540.53 542.26 536.97 543.13 544.06
Silver and gold production 1T21 2Q21 3Q21 4Q21 1Q22
Silver production K Au Oz 3,459 3,525 2,676 3,227 3,325
K Ag Oz gold production 52.00 59.14 42.21 47.98 41.64
Money made $/oz 25.66 27.14 23.97 23.49 24.68
Realized gold price $/oz 1,770 1,825 1,792 1,797 1,880
By-product Ag AISC 7.21 7.54 12.82 9.19 7.64

The data source: Company material 10-Q.

* Estimated by Fun Trading

Part I – Analysis: Details of silver and gold production for the first quarter of 2022

1 – Total silver/gold production

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HL: Quarterly history of gold and silver production (Fun Trade)

This quarter, gold and silver production was about the same sequentially, with silver production of 3.32 Moz and gold production of 41,642 Oz.

Production at the Lucky Friday mine and the Casa Berardi mine were lower sequentially as Greens Creek continues to recover.

  • Casa Berardi experienced lower production from the prior quarter due to lower grades milled as more material was processed from pit 160.
  • Lower production from Lucky Friday in the quarter was due to equipment delays which affected mine sequencing and resulted in lower tonnes milled and lower grades. Additionally, higher costs were experienced due to increased use of contractors resulting from labor shortages.

Below is the production history at Greens Creek:

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HL: Production History at Greens Creek Mine (Fun Trade)

Inflationary pressure is now a problem for the company. However, CFO Russell Lawlar said on the conference call:

Everyone in the industry sees inflationary pressures. Like others in the industry, we see these pressures on various aspects of our costs. For us, the main driver is labour, which represents 38% of our total production costs and has increased by 14% over the past year. Other costs that are essential, but individually low, increased from 24% to 56%. Over the same period, our base metal by-product revenues and our unit cost credits increased by 23%, more than offsetting inflationary pressure.

Details by mine below:

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HL: Quarterly gold and silver production by mine in 1Q22 (Fun Trade)

Metal prices in 4Q21 Price $
Gold per ounce

1,880

Silver per ounce 24.68
Lead per Lb 1.08
Zinc per pound 1.79

2 – History of all-in sustaining costs and realized price of money

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HL: quarterly silver price and AISC history (Fun Trade)

AISC silver is relatively low and gives the company a large profit margin even though the price of silver has recently fallen.

CEO Phil Baker said on the conference call:

Our consolidated all-in sustaining costs were under $8 an ounce, where a 70% margin of about $17 an ounce, so very low cost. Additionally, our silver mines have a very long life of over 14 years, and this does not include resource conversion or exploration potential. And our reserve base is the largest in the United States.

3 – 2022-2024 outlook unchanged

The tips are the same as those given in my previous article.

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HL: Presentation Guide 2022-2024 (Hecla Mining)

Part II – Financial Overview

1 – Total revenue was $186.50 million in 1Q22

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HL: quarterly revenue history (Fun Trade)

Revenue was $186.50 million in 1Q22, up from $210.85 million a year ago and up 0.7% sequentially.

Hecla Mining reported first-quarter earnings of $4.15 million, or $0.01 per diluted share, compared with $18.97 million in the same period a year earlier, or $0.03 per diluted share.

2 – Free cash flow was $16.43 million in 1Q22

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HL: history of quarterly free cash flow (Fun Trade)

Note: Generic free cash flow is cash flow from operating activities less capital expenditures.

Free cash flow over the last 12 months is $111.20 million, with free cash flow of $16.43 million this quarter.

3 – Net debt is $288 million in 1Q22

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HL: history of quarterly cash versus long-term debt (Fun Trade)

The company listed $212.03 million in cash. Net debt is now $288 million. Available cash exceeds $445 million for the first quarter.

Chief Financial Officer Russell Lawlar – SVP and Chief Financial Officer, said on the conference call:

We ended the quarter with $212 million in cash and available liquidity of $445 million. Supported by the strong financial performance, our leverage ratio remained constant at 1.2x, which remains well below our target of 2x. Based on these credit metrics, we have seen rating agency upgrades. Moody’s upgraded us to B1 while S&P upgraded us to B+.

4 – Proven and probable reserves in 2021

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HL: Mineral Reserves as of December 2021 (Hecla Mining)

This segment has not changed since my previous article. The company posted proven and probable silver and gold reserves of 199.92 million ounces Ag and 2.73 million ounces Au of gold, significantly higher than last year.

In addition, by-product metal, lead and zinc reserves amounted to 734,700 tonnes and 906,900 tonnes respectively.

Technical analysis and commentary

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HL: Short Term TA Chart (Fun Trade)

Note: Chart is adjusted for dividend.

HL forms a descending wedge pattern with resistance at $5 and support at $4.

The trading strategy is to take profits between $4.9 and $5.2 and accumulate below $4.20, with a possible low at $3.55.

As I said in my previous article, I recommend using around 50% of your long position to trade the LIFO, which is perfectly suited to the high volatility of the sector.

The price of gold fell dramatically above $1,900 an ounce and weakened due to the Fed’s hawkish inflationary move. The price of silver is also falling even faster.

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HL: gold and silver prices against GDX (Fun trade Stock charts)

However, if the gold price can somehow turn bullish from here, HL could trade above $6 with a possible retest of the 50MA at $6.25. It’s unlikely, but you always have to look at both sides.

To note: The LIFO method is prohibited by International Financial Reporting Standards (IFRS), although it is permitted in the United States by Generally Accepted Accounting Principles (GAAP). Therefore, only US traders can apply this method. Those who cannot trade LIFO can use an alternative by setting up two different accounts for the same security, one for long term and one for short term trading.

Warning: The TA table must be updated frequently to be relevant. This is what I do in my stock tracker. The table above has a possible validity of approximately one week. Remember that the TA chart is a tool only to help you adopt the right strategy. This is no way to predict the future. Nobody and nothing can.

Author’s note: If you find value in this article and wish to encourage such continued efforts, please click the “Like” button below as a vote of support. Thank you.

About William J. Harris

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