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Recently I wrote an article trying to reach out and find out what the heck was wrong with the share of Hecla Mining (NYSE:HL). I also own some shares of Nova Gold (NYSE:NG) only to see that stock get crushed by bad news and the seasonal correction that has hammered both gold and silver prices over the past 3 months.
Well, the next day my mentors over at Outstanding Investments (www.AgoraFinancial.com ) came up with some answers that demonstrate why they continue to be one of the best-performing newsletters and stock-pickers in the industry. Here's what they wrote to a subscriber who asked the right questions: "A reader named Susan asks: “What’s going on with Hecla Mining? The stock is down from our entry point. Is there any news that is depressing the stock? Where do you think Hecla is going from here?” 117-year-old Hecla Mining Co. (HL: NYSE) is headquartered in the silver mining country around Coeur d’Alene, Idaho. Hecla explores for, mines and processes silver and gold in the U.S. and Mexico. I added Hecla to the OI portfolio just a couple of months ago, right after Hecla announced that it was acquiring 100% interest in the Greens Creek silver mine south of Juneau, Alaska. (Greens Creek is one of the largest silver mines in North America.) In the original Hecla article, I noted that Hecla has a subsidiary in Venezuela. In 2007, the Venezuelan operation contributed just 3% of Hecla’s annual gross profit. I mentioned in the original article that the well-known political issues of Venezuela could affect Hecla’s operations down there. And just last week, Hecla announced that it is selling the Venezuelan unit to Rusoro Mining Ltd. of Vancouver. The total deal is worth $25 million. Rusoro will pay Hecla $20 million in cash and $5 million in Rusoro stock. In return, Hecla will cede control over the Isidora gold mine and the La Camorra mining facility in southeastern Venezuela, near a national forest. By selling its Venezuelan assets, Hecla is making a virtue of necessity. Venezuela’s Mining Ministry recently announced that the government of Hugo Chavez was considering rescinding Hecla’s concessions. This was due to a so-called “labor dispute” that interrupted operations at the Isidora mine. Read between the lines. The Venezuelan government, basically, threatened Hecla with a backdoor nationalization. So Hecla is getting out of there. Hecla will leave it to someone else to smooth the waters with Senor Chavez. And Hecla’s managers are no fools. Prior to the sale of the Venezuelan operations, Hecla repatriated approximately $39 million in cash from Isidora (although that transaction caused a $14 million foreign exchange loss). According to Hecla CEO Phillips S. Baker Jr., the sale of the Venezuelan properties is part of a strategy to reduce the financing it took to acquire Greens Creek. The transaction with Rusoro generates immediate cash from both sides: 1) the sale of the assets to Rusoro and 2) the repatriation of $25 million of net cash from Venezuela. And by exiting Venezuela, Hecla can concentrate on its operations in the U.S. and Mexico. Here are more details that are driving the stock price. Hecla currently carries the Venezuelan properties at a book value of $39 million. Thus, the sale to Rusoro will result in a pretax loss on the sale in the range of $10-12 million (subject to normal postclosing adjustments). The $14 million foreign exchange loss will also be reported in second-quarter 2008 results. This, plus the recent weakness in silver prices (similar to what I described with gold and NovaGold ), is the direct news that has been driving down Hecla stock. By divesting itself of La Camorra, Hecla’s 2008 gold production will drop by about 70,000 ounces, from an earlier guidance estimate of 115,000 ounces. (Most of the balance of Hecla’s gold output comes from the Greens Creek mine.) So 2008 is a transition year for Hecla. The Greens Creek news came quickly in the spring, and was an unexpected boon to the company’s long-term potential. That’s why we added Hecla to the OI portfolio. The news from Venezuela was not unexpected, but it’s never good to have to walk away from a decent mine. And it does not really “hurt” Hecla over the long term. Really, adios, Senor Chavez. Yes, overall, there will be a reduction in gold output for Hecla by selling Isidora. But Hecla is also enjoying a significant increase in silver production, due to Greens Creek. And while Hecla will no longer own a primary gold mine, the company will focus its efforts on mining silver and other metals in the U.S. and Mexico. Hecla will leverage its very deep and rich heritage and expertise as an underground miner. So what should you do with Hecla? The situation is remarkably similar to how I view NovaGold, except that Hecla is not a “developer.” Hecla is a serious “producer.” If you take a long view of the silver market, this is a good time to accumulate more shares of Hecla. Eventually, silver is going to resume an upward rise. When that happens, I think you will be glad you own shares in Hecla." This makes sense to us, although we might have to be more patient than I had first imagined. HL has smart leadership, awesome reserves, and low-cost silver production so there are plenty of reasons to be optimistic....just remember to keep your personal investment objectives and disciplines close at hand at all times.
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