Hecla Mining Company: Is the free fall over?
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| Topic: Silver Mining Companies — November 12th, 2008
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Hecla Mining Company has dropped from $13.00 to close yesterday at $1.25 on heavy volume of 7.29 million shares traded, registering a loss of 90%.
As the chart shows this silver producer has been slaughtered and currently sits on the bottom of its own downward channel. The technical indicators are struggling along the floor of their respective ranges, dramatically oversold but showing no signs of improvement.
The reasons for this pathetic performance can be attributed to a number of factors including the fall in silver prices where silver has dropped from around $22.00/oz to close yesterday at $9.76 registering a loss of 55%. Most of the silver producers have suffered along with silver, some losing up to 70% of their value, but Hecla has been hit especially hard. Secondly we can see the following extracted from Hecla’s recent financial results:
Hecla Mining Company (NYSE:HL) today reported a net loss of $3.8 million for the third quarter of 2008 compared to net income of $13 million for the same period of 2007
A statement of this nature is enough to spook shareholders and send them running for the exit. However if we dig a little deeper we find the following statement:
The company remains on track to meet the estimate of approximately 9 million ounces of silver production in 2008, at an average total cash cost in the range of $3.50 per ounce.
So, the target has not changed and if met would be a good result for Hecla.
Hecla Mining Company President and Chief Executive Officer, Phillips S. Baker, Jr., goes on to say:
Fortunately, the Greens Creek and Lucky Friday mines are two U.S. operations that are among the world’s lowest-cost silver mines. Both have survived in even tougher price environments, and we will draw upon that experience in these market conditions.
Again this offers some comfort however when the market decides that you are not the flavour of the month, fundamentals go out of the window as the stock is shunned. Going forward we expect gold, which is holding up fairly well to improve taking silver with it. Once the rally in the US dollar peters out and it resumes its trek south the precious metals sector should improve dramatically. At that point Hecla should be viewed as oversold and recover quickly. Of course there will be those who decide that enough is enough and they could use any rally to sell Hecla and return their cash to the sidelines. For now we will stay put as selling Hecla would give someone a bargain buy and we believe that better times are ahead for the whole precious metals sector.
Hecla Mining Company trades on the NYSE under the symbol of HL and has a market capitalisation of $223.74 with 169.50 million shares outstanding and has approximately $79.11 million in cash.
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My (obvious) question is: If this company has such a low cash cost on its silver production, why did it report a loss in the last quarter? I wish this question was addressed in the above article. (If Hecla is losing money, the fundamentals are not being thrown out the window. The fundamentals have been that Hecla lost money and investors are at least in part acting in rational response to that fact by selling the stock.)
Comment by RW — November 12, 2008 @ 2:57 pm
The question could be asked, who will be the genius who can look back in the future and say that he/she acted correctly and that the right decision was made?
The truth is that very few have any idea as to what to do and most are immobilized - just waiting. Confusion abounds and this government has got to figure a solution, and quickly. We know what the answer is but why doesn’t the guv.
John
Comment by John Ell — November 12, 2008 @ 4:15 pm
In reply to “comment by RW, I agree entirely with your sentiments. If Hecla is mining silver at US$3.50 per ounce how can it report such a thumping loss? I am not a shareholder - thank the Lord - but suggest SLW is a better buy, except that it has really short-changed shareholders by still avoiding paying a dividend - CHEAPSKATES!!!
DJdeSM
Comment by D.J. de S. Moore — November 12, 2008 @ 5:23 pm
Hecla Mining Company recently completed the acquisition of Rio Tinto subsidiary - Green Greek mines for
“The $750 million purchase price consisted of $700 million in cash and $50 million in Hecla common stock. Hecla funded the cash portion of the payment with approximately $340 million from its existing cash and the remainder was funded through a $380 million debt facility provided by Scotia Capital. The debt facility includes a $140 million three-year amortizing term facility and a $240 million bridge facility (of which Hecla drew $220 million at closing), which matures in six months. Baker said, “Our Greens Creek and Lucky Friday silver mines generate a great deal of cash flow at current metals prices, which is expected to enable us to pay off the debt in less than three years. We have organized this financing to include a bridge facility that allowed us to eliminate a bank requirement to hedge a portion of our future zinc and lead production, and therefore avoid the earnings volatility associated with mark-to-market accounting. Over the course of the next several months, we will be evaluating various opportunities to retire the bridge loan.” [end quote]
2008: 9M ounces of silver production (projected) = $81M.
2009: Say they produce 9M ounces stable (minimum), thats $81M @ $9 an ounce-silver every year. And for three years thats $243M.
That is not $380M dollars in 3 years (based on $13 an ounce?) when the market does not improve. Hmmm…maybe a bailout like GM?
Houston…ehh Washinton, we have a problem!
ps: Its not the best time to be doing giant takeovers. But its one hell of a buy if this works out nicely. Lowest price since 2000.
Comment by de Graaf — November 12, 2008 @ 8:49 pm
The cost of $3.50 an oz is the cost of production. It does NOT include various other costs of doing business. The actual cost of producing an oz of silver (including overhead and other expenses) is probably over $15/oz, meaning that HL will be losing big money on that 9.5 million oz of silver if they actually attempt to produce it.
My guess is that the prime silver short seller is JP Morgan, and it’s a good bet that these are NAKED SHORTS. Ultimately, companies like HL will be driven out of business, allowing the shorts to pick up miners for pennies on the dollar.
We’ve just returned to the era of Fisk and Gould in an environment of totally corrupt market regulators. Time for some class action law suits.
Comment by J. Victor — November 12, 2008 @ 9:21 pm
The total cash costs for silver of Hecla Mining Company per oz. is minus ~2.5x dollars (including byproducts, gold etc.) in 2007 if I’m not mistaken.
See financial report ‘07.
ps J. Victor; I for once would like to see what JP Morgan has left stored in there vaults…
Comment by de Graaf — November 12, 2008 @ 9:35 pm
Well, there’s your answer to the question: the freefall continues. HL hit $1 today (man, a buck for an old miner like this one, wow!) closing at $1.05. I do think there may be some truth to the naked short selling; it shows up in a few other companies as well, mainly in the USA. I really hate this type of market manipulation. Regarding the futures price of silver at $9.31 (Wed. at 6 p.m. PST); try to buy any physical silver at this price - there isn’t any. If you can even find ANY silver bullion for sale, it is at a huge premium. So, is someone forcing the futures price down when there is no silver to be bought? See the GOT GOLD REPORT by Gene Arsenault on www. resourceinvestor.com for a bi-weekly analysis of gold and silver Comex activity.
Comment by Bob G. — November 13, 2008 @ 2:03 am
I decided to go take a look at the technical charts going back 3 yrs./5 yrs./and 10 yrs. The last time the price was in this position was back in early 2002; the technicals haven’t been like this since late 2000; almost 8 years ago. Either it’s a fantastically unbelievable buy at $1.05, or there is something fundamentally wrong. Should we believe the management that they’ve “been here, done this before”? It’s all about risk and these are risky times, as no bottom has shown itself. My gut tells me this has farther to drop, but we haven’t seen the final capitulation yet.
Comment by Bob G. — November 13, 2008 @ 2:15 am
Hecla’s TOTAL cost of production per ounce of silver for the 3rd quarter, was $8.52. For the YTD, it was $6.68. My goodness, their new wholly-owned Greens Creek mine is the lowest cost silver mine in the world. If HL goes down and out, then we’ll have a whole lot more to worry about in the world, than stocks.
http://media.corporate-ir.net/media_files/irol/63/63202/Fact_Sheet.pdf
Comment by dfergu7477 — November 13, 2008 @ 4:41 am
Do they really need anything left in their vaults? The shorts are naked– nothing but paper. And they’re flush with taxpayer money to do whatever they want with the help of the CFTC. When the smoke clears, they think they can cover with our silver, or the CFTC will allow them to cover without silver. I think that’s the game.
Comment by J. Victor — November 13, 2008 @ 4:36 pm
If Victor is correct and the total production costs for HL exceed $15/oz., then there are a lot of questions that have to be answered by the ocmpany. Could some knowlegeable person nail down this situation, perhaps the good folks at Silver Prices.Net? It is beyond me. Thanks.
Comment by John Ell — November 13, 2008 @ 4:55 pm
Just look at the financial report on their website.
Total cash costs approx. $-2/oz. (including byproducts gold, zinc and lead)
I don’t now where J. Victor gets the $15/oz from.
Comment by de Graaf — November 13, 2008 @ 8:48 pm
I have added a link for your reference;
The total cash costs per ounce are stated in the 3rd alinea.
http://phx.corporate-ir.net/phoenix.zhtml?c=63202&p=irol-homeProfile
Comment by de Graaf — November 13, 2008 @ 9:21 pm
Thanks, de Graaf for the input. I decided to hold my position regardless of this price, as though there is a choice.
But, wait, there is a choice - I could buy more! After all isn’t it a calculated risk on a seasoned company?
J
Comment by John Ell — November 13, 2008 @ 11:29 pm