I think that presents some value for investors willing to take a contrarian view.
As I write this, Hecla Mining is down 50% in the past 52 weeks. I honestly find this situation a headscratcher − especially in light of where silver prices may be headed.
What's more, the company is sitting on a horde of cash and carries no net debt. This means the company is stable and able to function without access to capital markets.
As an investor, I consider this situation nearly bulletproof.
Notice that I said "nearly" − not completely.
There is one thing that can severely damage a company with a solid balance sheet. It is called lawsuits.
Unfortunately for Hecla, they had a bad 2011 in that regard.
The company had two fatal accidents at a producing mine with an additional third event that injured seven more workers.
These events caused the Mine Safety and Health Administration ( MSHA) to close the shaft in question and require the removal of built-up material before Hecla can resume operations.
Known as the Lucky Friday mine, it may be shut down throughout 2012.
In the aftermath, a specific group of investors became so angry with management's disclosures relating to these fatal accidents that they filed suit.
This bad luck streak in the mines and in the courtrooms has hammered the stock price to a point I now find cheap, even considering the potentially damaging lawsuits.
In short, when I look at Hecla Mining today, I see value investing is at its best.
I love to find an out-of-favor stock where the fundamentals are still strong and the company is already profitable.
It's time to "Buy" Hecla Mining Co. (**) – before the market sees the silver lining in the fundamentals.
Hecla Mining's Silver Lining
You see, Hecla Mining Co.:
- Has Record Revenue
- Has Record Production
- Pays a Silver-based Dividend
- Is the Largest U.S. Producer of Silver
- Has Low Price-to-Earnings
Hecla announced record results in its latest earnings report. Revenue in 2011 was $477.6 million with gross profits of $265 million.
The company produced 9.5 million ounces of silver with a cash cost to produce, after adding in byproduct credits, of $1.15 per ounce.
Hecla also pays a dividend based on the price of silver. It's an unusual feature and another reason why I like the stock.
From their most recent release:
"Our Board's action to declare the silver-linked dividend and introduce a minimum quarterly dividend, reiterates Hecla's excellent operating margin and strong financial position," said Hecla's President and Chief Executive Officer, Phillips S. Baker, Jr. "In addition to increased cash returns, our shareholders will also have an opportunity to benefit from higher silver prices."
Hecla is also the largest silver producer in the United States and is reaching that volume from just two total producing mines.
While the S&P 500 has an average price-to-earnings ratio of 13, Hecla has a price-to-earnings ratio of 9 with analyst expectations of that dropping to 8 in the next year.
Key Points on Hecla Mining
Founded in 1891, Hecla is based in Coeur d'Alene, ID. It employed just over 700 at its last reporting.
The company has a $1.36 billion market capitalization. Its enterprise value, which takes net cash and debt levels into consideration, is $1.16 billion. The difference in this case is the surplus cash the company has on its balance sheet
Hecla has historic revenue and gross profits, and has paid off its long-lasting lawsuit. While shareholders have started a new fight with management, it is my opinion that Hecla appears cheap at current market prices.
While others hate the stock, I see value on the table. You rarely get a chance to buy a stock that is debt free, has ample cash and no dilutive financing needs, is throwing off profits, and is the largest producer of its commodity sector in the United States.
If you don't have exposure in Hecla, consider being a contrarian and picking up a small tracking position now while we watch the company turn around.
Let's look to pick up 50% of our position via limit orders around the current market price.
We can then put in a limit buy order 5-10% lower to see if we get a lower cost basis on the position.
(**) Special Note of Disclosure : Jack Barnes has no interest in Hecla Mining Co. (NYSE:HL).
Barnes launched his own shop, RIA, in 2003, just as the second Gulf War was breaking out. In early 2006, after logging a one-year return of nearly 83%, Forbes named Barnes the top stock picker in its "Armchair Investors Who Beat the Pros" competition. His two audited hedge funds generated double-digit returns in 2008.
Barnes retired to the beach in the summer of 2009, and continues to write from there. He's now the author of the popular blog, "Confessions of a Macro Contrarian," and his "Buy, Sell or Hold" column appears in Money Morning on Mondays. In his BSH column last week, Barnes analyzed Augme Technologies Inc. (OTC:AUGT).
News and Related Story Links:
- Money Morning:
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- Money Morning:
Special Report: How to Buy Silver
- Money Morning:
Investing In Silver: How to Buy Silver Coins and Bars
- Money Morning News Archive:
Previous "Buy, Sell or Hold" Features
Confessions of a Macro Contrarian