Hecla Mining: A Highly Leveraged Silver Miner. (NYSE:HL)

Introduction

Most investors don’t see what is about to happen. The US economy and US government are over-leveraged. They have become strained to a breaking point. US government interest payments on the national debt have reached $1T and are not going down anytime soon. The US government’s 2024 deficit is projected to be well over $1T and is approaching $2T. And, with that backdrop, a recession is about to unfold.

Investors have been hoodwinked by Wall Street to believe the economy is fine and we will have a soft landing in 2024, with no pain. In fact, if you ask someone on Wall Street, they will tell you earnings for the S&P 500 are projected to be up 10% to 12% in 2024, and all is well.

The real story is that the massive debt held by consumers, corporations, and the national government is going to become a big problem in 2024. This is basically 2008 revisited, only this time, the Fed is out of solutions. Fear is going to explode, and investors are going to run to risk-off assets. Guess who benefits the most? Gold. And guess who always follows gold? Silver.

Of course, this is a thesis, and I could be wrong. But if I’m right, gold (and silver) will decouple from most asset classes and run by itself.

This is where Hecla becomes an absolutely beautiful risk-reward bet. It is highly leveraged to higher silver prices. It’s not a high-cost producer, so margins should expand significantly. At $50 silver, it should have FCF (free cash flow) of $600M or higher (my guess is higher). And with those huge margins, its FCF multiple should easily reach 25 (it’s currently around 22).

Hecla is the ideal play for this thesis because of the location of its mines (North America), its brand name (the #1 silver producer in North America), and its margins (reducing its risk).

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Company Overview

Hecla Mining is a silver and gold mining company (about 37% revenue from each). They are a low-cost silver producer, with cash costs of around $3 per oz after offsets. They have a leveraged balance sheet with $600 million in debt and only $100 million in cash. In 2023, they should generate around $140M FCF at somewhat low silver prices. They tend to do well during bull markets because of their brand name (the #1 silver producer in North America) and the location of their mines. Institutions will buy the stock like candy if silver prices break out.

They can currently generate FCF at around $15 silver, which is something that many silver producers cannot claim. As long as they don’t add more debt and silver prices don’t crash, they should be okay. They have plenty of reserves and huge resources (13 million oz of gold, and 800 million oz of silver), although I don’t think they will mine all of these resources.

This is a company with high leverage to higher silver prices. They have several development projects. In the long term, they could easily double silver production. They have two large silver projects in Montana (330 million oz) that are being permitted. They are having permit issues at one of the projects in Montana, and it might not get built.

In 2021, they acquired Klondex Mines, which has big potential in Nevada for increasing gold production. In 2022, they acquired Alexco Resources, which added around 3M oz of silver production, and should add another 2M oz over the next few years. They are giving guidance of being a 20M oz AG producer in 2025.

In 2024, they will produce about 15 million oz of silver and 175,000 oz of gold (used as offsets). As a speculation bet on higher silver prices, it looks pretty good. They do have a large market cap of $2.7 billion, but they could still appreciate quickly. This will perhaps prevent them from being a 10-bagger (at $100 silver), but I wouldn’t rule that out with their resources and pipeline. The key will be if they can get one of their Montana projects (Rock Creek and Montanore) permitted.

I am valuing them as a future 20M oz silver producer with potential FCF of $1.6B at $100 silver. I think both of these targets are doable. If they get a 20x multiple, that would make them worth $32B. I don’t think that’s a stretch, and it could be higher if one of their Montana projects gets built.

They plan to pay a higher dividend as silver prices rise. They expect to pay an 8% yield at $35 silver, and a 15% yield at $45 silver. That’s stunning.

Company Info

Cash: $100 million

Debt: $600 million

Current Silver Resources: 600 million oz.

Estimated Future Silver Resources: 400 million oz.

Estimated Future Silver Production: 20 million oz.

Estimated Future Silver All-in Costs (breakeven): $20 per oz.

Scorecard (1 to 10)

Properties/Projects: 8.5

Costs/Grade/Economics: 8

People/Management: 8

Cash/Debt: 7

Location Risk: 8

Risk-Reward: 8

Upside Potential: 8.5

Production Growth Potential/Exploration: 8

Overall Rating: 8

Strengths/Positives

Significant upside potential

Significant production growth potential

Good management

Large resources

Brand name

High leverage to higher silver prices

Risks/Red Flags

High debt

Potential share dilution

Potential cost overruns

Potential cost increases

Lower silver prices

Speculation stock

Valuation ($75 silver prices)

Production estimate for the long term: 20 million oz (expected in 2025)

All-In Costs (break-even): $20 per oz.

20 million oz. x ($75 – $20) = $1.1 billion annual FCF.

$1.1 billion x 25 (multiplier) = $27.5 billion

Current FD market cap: $2.7 billion

Upside potential: 900%

Note: I used a $75 silver price to identify their future value because I am a long-term investor who plans to wait for higher silver prices.

Note: My All-In Costs are the expected costs that will generate FCF.

Note: I used a future FCF multiplier of 25 because I am confident they will get a high multiple at higher silver prices. Their multiple today is 22.

Balance Sheet/Share Dilution

They have high debt at $600 million but enough free cash flow to make their required payments. I don’t consider Hecla to be a high-risk company because they have strong margins at low silver prices. This is a company that will likely survive any downturns.

Of course, all mining stocks are speculation stocks because you cannot anticipate all of the potential things that can go wrong. If a mine goes offline for some unknown reason, it can bankrupt a company.

I don’t anticipate any share dilution, but that could easily occur if their cash balance drops much below $100 million.

Risk/Reward

I consider Hecla to be one of the better silver risk-reward stocks. They are the number one silver producer in North America and have been around for a long time. They are an excellent long-term play waiting for my thesis to play out.

While risk is not contained or low, it is also not extremely high. It is a risk level that I am comfortable with. I expect them to be around when silver prices eventually take off.

The reward should be extremely high if my thesis plays out and investors are forced to run to risk-off assets. This should push silver prices up, and Hecla’s margins should become large. In tandems with large margins, Hecla’s balance sheet should improve substantially. This should push their FCF multiple to my expected levels or higher.

Investment Thesis

I explained my thesis for Hecla in the introduction. I don’t think investors are aware that the debt bubble is about to push investors into risk-off assets, and that Hecla will be a major beneficiary of that outcome.

While Hecla is a speculation asset, this is actually an ideal situation. You want a speculation asset that is highly leveraged for a specific outcome. When I look at the debt bubble, I see the main beneficiary to be gold. However, silver is leveraged to gold. So, I would rather make my bet on a silver miner.

How is silver leveraged to gold? Historically, the GSR (gold-silver ratio) is well below its current level (around 90). In 2012, the GSR shrank to 39. That is more than 2 to 1 leverage using silver miners versus gold miners if it goes back to 39.

I think Hecla shares could be a rocket ship if my thesis plays out. Of course, this is a contrarian play. Most investors think silver will only rise along with correlated costs, thereby reducing the upside potential. What they are missing is that the debt bubble will cause investors to run to risk-off assets while, at the same time, mining costs will remain benign. This will cause large margins and outsized gains in gold/silver mining shares.

Hecla is ideally suited for this outcome because institutions will only have a few choices for silver miner exposure, and most of those choices are in Mexico. The safe location of Hecla’s mines will be a magnet for institutional money. I like to use the phrase that institutions will buy Hecla like candy. This is why it should be a rocket ship. Best guess!

Final Thoughts

One last thought. I think we will see at least one more correction in gold/silver prices. For this reason, it would be a good idea to buy Hecla to the bottom. That’s how I often invest to create a position, until I am comfortable that I have enough shares.

I have 10,000 shares of Hecla, so I am not adding. But if I only had 1,000 shares or less, I would buy to the bottom until I felt I had enough. How do you buy to the bottom. It’s basically dollar-cost averaging each time the price drops. You buy some at $4.30, then more at $4, and more at $3.80, etc.