How you can make GOLD with Silver!

There’s a lot of uncertainty in the equity markets these days.  We’re up 100 one day and down 200 the next.  Who do you blame?   Greece, Ireland, the entire European Union? 

Maybe it’s the economic data. 

Anyway you look at it we’re surrounded by uncertainty.

But that’s not necessarily true for all the markets.  Just look at the precious metals markets.

Since the beginning of the year, Gold and Silver have outperformed almost everything.

We’ve seen gold hit $1,900, and silver has been trading well above $30.

There are alternatives to buying physical commodities, and one of the most popular is investing directly into precious metal producers.

As always there are positives and negatives with any investment. Investing in mining stocks instead of the mineral itself has added risk. Companies can mismanage their resources and make dumb decisions.

But they also offer a potential opportunity to make a much higher and faster return on your investment.

There is one thing I can guarantee: A gold or silver bar in a safe deposit box isn’t going to pay you a dividend. But the mining stock we’re talking about today is going to pay one this quarter.  

 

A LONG HISTORY
Hecla Mining (HL) still maintains the name it was founded under over a century ago. The company’s perseverance has secured its position as the largest silver producer in the U.S.

Hecla currently has two operating mines and a number of exploration projects. Their Greens Creek, Alaska mine accounted for approximately 75% of Hecla’s 2010 revenue. The Lucky Friday mine in Idaho accounts for the rest of their cash flow. 

The Greens Creek mine was discovered in 1975, with production beginning in 1989. Kennecott Greens Creek operated the mine until 2008 when Hecla purchased full control.

Hecla has owned and operated the deep underground Lucky Friday mine in northern Idaho since 1958. There are still considerable proven reserves in the Coeur d’Alene mining district where the project is located. In 2008 the company purchased an expansion to Lucky Friday known as the Gold Hunter deposit.

Lucky Friday is conveniently located a mile east of Mullan, Idaho and Interstate 90. It also has a mill capable of processing 1,000 tons of ore a day. The mill produces lead and zinc concentrates that are shipped for treatment to a smelter in BC, Canada.

Hecla then sells the lead or zinc concentrate to custom smelters. They sell their gold and silver in bullion form, both refined and unrefined, to precious metals dealers.

Who Says You Can’t Keep Costs Down In the US?

Hecla has managed to keep their cash costs low and their margins huge while operating in the U.S.

The mining industry has a convenient non-GAAP cash cost per ounce metric. It’s useful for comparing similar companies in the sector.

In 2010 Hecla was producing silver at a non-GAAP cash cost of negative $1.46 an ounce. With an average realized silver price of $22.70 an ounce, that’s a cash margin of $24.16.

It means they actually make money form all the other minerals they dig up, not counting the silver!  Talk about a silver lining!

Coeur d’Alene Mines Corp (CDE), which operates in the same Idaho mining district, had non-GAAP cash cost of $4.10 per ounce of silver in 2010. Silver Wheaton (SLW), a similar company, had a similarly high 2010 non-GAAP cost of $3.97 an ounce.

Even better for Hecla are the considerably higher realized silver prices in 2011. In Q3 2011 the average realized silver price was $37.02 an ounce.

Thanks to higher prices of zinc, lead, and gold, Hecla’s silver revenue is just about all profit. It certainly makes for an attractive bottom line and a nice healthy operating margin of 40%.

 

WHICH LEADS US TO DIVIDENDS
On November 8 2011 management announced a new silver price-linked dividend in their quarterly conference call. Phil Baker, Hecla’s CEO, said he believes this plan will make HL more attractive than similar silver companies and ETFs.

Here’s how it works. The minimum realized price of silver to trigger the dividend is $30. At that price HL common stock will pay $0.01. At every five dollar increment the dividend goes up another cent.

The average realized silver price in Q3 2011 was $37.02, which means a $0.02 dividend.
Here’s The Numbers

Hecla has had solid revenue growth over the past few years. Revenue was $312.6 million in 2009, and reached $477.6 million in 2011.

This company takes a lot of pride in having a low cost of revenue. Their 2011 cost of sales was only $212.6 million. Down from last year, and nearly as low as 2009’s cost of sales of $211.5 million.

Hecla’s net income in 2011 was up 208.6%. Net income in 2010 was $48.9 million. The company reported net income of $151.2 million for 2011.

Hecla had $266.5 million cash on hand at the end of 2011, and debt of $10.3 million.

 

HECLA’S FUTURE ENDEAVORS
Hecla, like any good mining company, is constantly exploring. They are always looking for expansions on and near their two producing mines, Lucky Friday and Greens Creek.

Near Lucky Friday is the Silver Valley district. Hecla and its subsidiaries are using 3D modeling technology and drilling to identify reserves and potential mineralized zones in Silver Valley.

The company also entered into a 2008 joint venture with Emerald Mining and Golden 8 to explore a 21-square-mile land package in Colorado.

The package is in the Creede Mining District in the southwest corner of the state. They’ve identified approximate reserves of 48 million ounces of silver.