Gold and silver miner Hecla Mining (NYSE: HL) had a rough year in 2018, with its stock falling around 40%. There were a number of factors behind that, including weak earnings, soft commodity prices, a strike at a key mine, and a heavy debt load. But Hecla also made some investments in its future, expanding into Nevada via acquisition. It believes that move, including mine-level improvements at the purchased assets, will help strengthen results in 2019 and 2020. When you look to the longer term, though, the company's future is likely to be driven by two investments in Montana. And the news there hasn't been very good lately.
What it means to be a miner
Running a mining business is a complex, expensive, and labor-intensive job. From a big-picture perspective, a miner has to find a location that might have precious metals (or other key materials, like copper). It then has to get permission to start building a mine. Assuming it can get its plans approved, the company will build a mine. And -- not a small issue -- it has to hope that the mine actually lives up to its predevelopment expectations. Lower ore grades or more-difficult-than-expected mining conditions can quickly turn a great plan into a bad investment.
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Once built, a mine is operated until it is no longer economically feasible to run, at which point the company must return the land to its pre-mining state. A lot can go wrong here, but there's one thing inherent to the process -- each mine has a life cycle and will eventually close down.
Indeed, mines are depleting assets. Once you pull an ounce of gold, silver, or copper (or whatever is in the mine) out of the ground, it is gone. And once you pull all of the commodity from the mine, you need to find a new mine to replace it, or the business will start to shrink. Running a mining company is like running on a treadmill in some ways: You can never stop to rest because you always have to be on the lookout for the next mine.
Bad news for Hecla
This is exactly why Hecla investors need to be concerned about the fact that a judge recently blocked a permit for Hecla's Rock Creek mine project in Montana. This is one of two mines in the state that the company is planning to build in close proximity to each other. The other proposed mine is called Montanore. Bad permitting news at one mine is a bad omen for the other mine. Hecla's stock dropped around 10% following news of the adverse judgment at Rock Creek.
There's a couple of reasons for this. First, these two mines are in close proximity to the company's operating Lucky Friday mine in Idaho. The goal is to benefit from economies of scale by running a number of assets in the same general region. That will help lower costs for Hecla, which would be a good thing. Hecla's all-in sustaining costs (AISC, which includes operating costs and investments to maintain operations) for silver in 2018 were $11.44 per ounce, versus a year-end silver spot price of $15.40. Although by this metric it's profitable on the silver side of things, the company's AISC costs for silver rose over $3.50 per ounce last year. As for gold, Hecla's AISC were $1,226 last year compared to a year-end gold price of $1,282 per ounce, which isn't much breathing room. Keeping a lid on costs would be a good thing for the miner.
However, it's the second reason for the stock decline that should really worry investors. Rock Creek and Montanore are the company's two largest projects. The inferred resources (the amount of a commodity a miner's earliest estimates of the location's potential) at these mines dwarf any of its other long-term projects. Putting some numbers on that, the company hopes to find 148 million ounces of silver at Rock Creek and 183 million ounces of silver at Montanore. Together, these two assets make up 70% of Hecla's inferred silver resources.
In addition to the silver, Hecla hopes to find 658,000 tons of copper at Rock Creek and 759,000 tons of copper at Montanore, together making up virtually all of its inferred copper resources. If these numbers are close to accurate, Rock Creek and Montanore could rank among Hecla's largest operating mines.
There's no near-term worry, because the company still has plenty of silver and gold to mine for now, but every ounce it pulls out of the ground is one less ounce it has to mine in the future. And eventually, it will need to bring on new mines. So the setback at Rock Creek is notable because it will clearly be an important mine...but only if it gets built. The same holds true for nearby Montanore, which will likely experience the same environmental and regulatory headwinds that impact Rock Creek. If these two mines don't pan out, Hecla will have a big problem on its hands.
Far in the future, but still a concern
At this point, Rock Creek and Montanore are nowhere near close to contributing to Hecla's production. And near-term financial results aren't really going to be impacted by the trials and tribulations at these two proposed mines. That said, these are important long-term investments for Hecla. If they don't pan out, the miner will have to go back to the drawing board and find other investments on which to build its future. That, in the end, is why Rock Creek and Montanore should be on your radar, even if they aren't material to today's financial results.
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