With a five-year range that includes a high of $11.27 and a low of $2.65, the share price of Hecla Mining (HL) closed at $3.26 on Friday, or at only 7% higher than the low price of the range.
After being hated for nearly three years, HL is finally making its move. Not unlike the 1974 to 1976 bear market in the precious metals (PM) shares, the 2011 to 2014 bear market has been particularly longer and more psychologically brutal.
But, “the bear market in gold is over, and gold again is in a bull market,” 55-year veteran market observer and newsletter, Richard Russell, told King World News. After watching gold and silver prices soared $41 and $0.86, respectively, on Thursday, Russell range the bell, declaring: the bear is dead! Long live the bull!
And we agree we the venerated Russell, as our Special Alert last week regarding McEwen Mining was quickly drafted to notify regular Jason Bond Picks web site visitors of the start of the long-awaited resumption of the most exciting bull market yet to come in the PM mining shares.
The broad market indexes are comparatively overextended when compared with mining shares such as Hecla. And we see the gap between the S&P and Hecla closing substantially once again by year-end. Note the high negative correlation (bottom of chart, -0.81) between the S&P and HL since the start of 2013.
And the chart, below, also gives our readers a snapshot of the potential upside to HL. After market manipulators continuously through everything but the beloved pet dog at the PMs and, by proxy, the PM shares, HL would not succumb to its $2.65 low. So, if you haven’t been scanning junior mining stocks since Thursday’s abrupt spike in everything-precious-metals, we’ve done some of the due diligence for you in recommending a look at Hecla Mining.
The above-mentioned chart implies that when the silver price breaks above $22, and remains above $22 for more than just a few trading days, the next target price for silver is the all-time high of approximately $50. Concurrently, during the silver bull, HL could test $11.27 – a whopping 245% from today’s prices – on the back of a 138% in the price of silver. Now that’s leverage, folks!
We expect HL to cross the price of silver (according to the chart) during the next phase of the silver price run-up, as the price of HL reflects the leverage offered by the company’s low-cost mining operations (see “Overview”).
Founded in 1891, today, Hecla Mining reports the largest silver production in the United States. Hecla operates the Green Creek operation in Alaska, and the Lucky Friday mines in Idaho. Adding to its gold production, Hecla recently acquired the Casa Berardi gold mine in Quebec.
Hecla ranks among the lowest-cost producers of silver ore in the industry.
Approximately two-thirds of Hecla’s revenue is derived from silver and gold mining, while the remaining one third of the company’s revenue comes from the sale of lead and zinc.
Hecla’s low-cost production is well-known among the PM aficionados, attracting investors in droves during any rally in the precious metals. Though management has been criticized by some for zigging when it should have zagged during the run-up in PM prices leading up to the crash, and vice versa during the fall in prices of gold and silver, we do not at all view Hecla’s management as incompetent. We do see, however, a management that had been caught flatfooted during the abrupt slam down of the precious metals market in 2011, and during the subsequent three-year bear slide in the PM complex. We ask: which mining company wasn’t hoodwinked by sudden collapse of Lehman Brothers?
But that frustration among investors we suspect will soon be water underneath the proverbial bridge. When the expected earnings start to roll in, management will then be viewed as genius.
But, you may ask: among all the PM shares out there, why trade Hecla?
One the most important keys to levering returns on the back of any commodity price rise is the company’s cost of production. Another important key to trading mining shares is the jurisdiction in which the company mines ore. The U.S. and Canada (Hecla’s mining jurisdictions) are not ranked as high-risk jurisdictions, according to the Organization of Economic Cooperation and Development (OECD).
i) Expected 2014 silver production is between 9.5 and 10 million ounces with expected gold production of 180,000 ounces.
ii) 2014 reserves totaling 170 million ounces of silver and 2.1 million ounces of gold reserves.
iii) Cash costs, after by-product credits, per silver ounce is expected to reach as low as $6.50.
The following chart is Hecla’s 2014 guidance, which was included in Hecla’s Q1 earnings news release of May 15.
A share of Hecla trades at a Price-to-Book of 0.85. Compared with the S&P Price-to-Book of 2.74, there’s plenty of potential catch-up to do in the share price of Hecla. At a 2.74 Price-to-Book, HL would trade at $10.54, the rough estimate of which is close to our short-term target price of $11.00.
We assess the latest large move higher in the price of precious metals at a 90% confidence level for a continuation of the move still higher. After three years of declining gold and silver prices, we believe the PM market is set for the third phase of the bull market. A stake in Hecla mining allows a leverage position (with expiration) in the outlook for higher precious metals prices.
With strong guidance from management, we believe gross margins will be superior to its peers in the coming months and years, with silver production margins grossly outstripping gold’s still-impressive margins. Latecomers to the PM shares will most likely include HL as a ‘buy’ candidate based on this factor along with the attractive jurisdiction of Hecla’s three operating mines.