PSB Monthly Issue December 2011

| December 6, 2011

December 2011


Editor’s Note:  This month we’re highlighting one company instead of the usual two. As you’ll see, we’re very excited about this pick.  We think it deserves to stand alone. We’ll be back with two next month.

Precious metals have been a mixed bag in 2011.  Gold is up 21% this year after a big 26% rise last year.  However, most other precious metals are down for the year.

But we don’t expect them to stay down for long.

The case for owning precious metals remains strong.  It won’t be long before investors are once again snapping up gold, platinum, and of course, silver.

Why are so many investors choosing precious metals, especially silver for their investments?

Some investors buy silver as a hedge against inflation.  They’re worried all the central bank money printing is going to spark surging inflation.

Another reason investors are buying silver is pure speculation.  Many are taking advantage of the extreme volatility in precious metals.

What’s more, there’s industrial demand for the shiny metal.  Silver is used in electronics, batteries, industrial production, and even in plastics.

And the least talked about reason…

Precious metals are hard assets.  They have zero “counterparty risk”.  In other words, they can never default.  With so many countries threatening to default on their debt, a good number of investors are seeking the safety of precious metals, including silver.

So, what’s the best way to invest in silver right now?

Now, you don’t have to run out and buy physical silver.

While physical metals are great investments, they do have some drawbacks.  Physical silver doesn’t pay dividends.  You don’t earn any compound interest on your investment.  And, there’s no cash-flow.

A better way to invest in silver is by owning shares of quality silver mining companies. I’m talking about companies that are pulling the metal out of the ground.

Not only can miners benefit from selling silver as prices rise, they can produce more of the metal.  Silver doesn’t have to move higher from current prices for miners to post huge gains.

So long as silver prices remain fairly stable, miners can lock in sales at attractive prices.  Plus, if prices continue to increase, miners will see significant margin expansion.

And now is a great time to buy silver mining stocks.

Silver miners’ per share earnings are reaching the highest levels in years.  Many miners have cut costs.  And they’re taking advantage of the 226% increase in silver prices since late October 2008.

But despite strong growth, investors are ignoring silver mining stocks.

As the chart below shows, the Market Vectors Junior Gold Miners ETF (GDXJ) is underperforming the price of silver this year.  In fact, mining stocks are about 35% below the physical metal.


But not because there’s anything wrong with the miners fundamentally.

Nope, mining shares are just down with the overall market.  These are stocks after all. And as such, they’re subject to the ebbs and flows of the market.

However, investors aren’t likely to let the disconnect between silver mining stocks and silver prices last too long.  At some point, the market will correct the discrepancy.

And once silver miners close the gap, savvy investors will be sitting on some hefty gains.

As John Wong, a portfolio manager at CQS Group’s New City Investment Managers in London recently said, “When you look back in history, you will say this was a buying opportunity.”

So, which silver miner do we think has the best upside potential?  The one we believe is ahead of the curve and poised to soar is… Hecla Mining (HL).

Key Investment Data

Name:  Hecla Mining
Ticker Symbol:  HL
Market Cap:  $1.7 billion
Recent Price:  $5.97

PSB Rating System 4.7 Stars

Raging Revenue:  (4.7 stars) Revenues are growing nicely despite the weakening economy.  In fact, revenues are projected to grow 12% to over $556 million in 2012.

Beautiful Books:  (4.8 stars) Earnings are surging at Hecla this year, up 59%.  The trend is expected to continue into 2012 with projected earnings growth of 33%.

Stellar Structure:  (4.8 stars) Insider ownership of 10% shows insiders love this company.  And with institutional ownership of 42%, there are plenty of smart money investors who already see these shares moving higher.

Valuation Verification:  (4.6 stars) With a positive outlook, the stock is still nicely undervalued.  Based on our valuation analysis, we think the stock is worth at least $10.00 a share.  That’s upside potential of 68% or more.

Meaningful Milestones:  (4.8 stars) After many long years of performance, the company is still strong and growing.  This year the company’s continuing to grow and profit.  And they’re expected to remain profitable for years to come.

Let’s take a closer look at this intriguing company.


Hecla Mining is one of only a handful of silver miners based in the US.  In addition to owning 100% of their producing mines, the company is the largest and lowest-cost silver producer in the United States.

Hecla has a long history of large silver reserves, high production levels, and a great exploration program.  And as an added benefit, Hecla also has exploration and mining operations for gold, lead, and zinc.

So, what’s so special about Hecla?

The company has all three qualities that make for a top mining company.  They have abundant reserves, increasing production, and an aggressive exploration program.

Let’s take a closer look at Hecla’s operations now…

The Greens Creek Mine

Hecla’s Greens Creek mine is based on Admiralty Island in Southeast Alaska.

Since acquiring Rio Tinto’s 70% interest in 2008, Hecla has nearly doubled their silver reserves and metals production.  In just the first six months of 2011, Hecla’s reserves were approaching a whopping 100 million ounces.

Some quick math and you see these reserves alone are worth a stunning $3 billion.

No question about it, Greens Creek is a gem. It’s one of the world’s largest high-grade, low-cost silver mines.  And it has produced more than 200 million ounces in the last 20 years.

More importantly, Hecla expects production to keep increasing from 9 million ounces this year to 11 million ounces annually by 2016.

That’s a lot of silver… What about their other large mine?

Lucky Friday Mine

The Lucky Friday mine is located in northern Silver Valley, Idaho.

It’s the deepest operating mine in the United States and has been in commercial production since 1942.  Over the past 69 years, a staggering 147 million ounces of silver have been mined.

The Lucky Friday mine currently produces about three million ounces of silver every year.  But that figure is about to jump significantly.  Hecla started constructing an additional shaft that should increase production by 60% to five million ounces annually.  It’s expected to be completed in the next few years.

And let’s not forget… Hecla owns 100% of this mine as well.

While production is important, a strong exploration capability is the key to long term success.

And Hecla has an aggressive exploration division…

You see, a small mining company with only a few good mines always runs a risk.  What happens if a mine collapses?  What happens if a mine runs out of reserves?

A quality mining operation will always look to discover new sources of production.  It’s the only way to ensure the business continues into the future.

And Hecla’s management team knows this all too well.  They have a large team constantly exploring for new land to mine.  In fact, they have two large projects already in motion.

One is the San Juan Silver Mine in Creede, Colorado.

Hecla has a 70% interest in the roughly 21-square-mile consolidated land package in Colorado’s most prolific silver-producing district.  The property has identifiable resources of approximately 26 million ounces of silver with potential for more.

The other exploration mine is the San Sebastian mine in Durango, Mexico.

Hecla is engaged in a big exploration program on the 300-square-mile property.  They predict that once this mine is operational, it’ll have the potential to produce another five million ounces of silver annually.

These two projects are key to Hecla’s future.  Management believes these mines will eventually provide production upwards of 31 million ounces every year.

Think about this for a second…

With silver trading at $30 per ounce, Hecla’s two exploration projects could add nearly $1 billion in silver production annually.

This raises a great question.  Just how well is Hecla doing financially speaking?


Hecla has been growing by leaps and bounds over the last decade.  Revenues have mushroomed from $85 million in 2001 to $419 million in 2010.  That’s a hefty fivefold increase in just ten years.

And the trend has continued in 2011…

Over the first nine months of the year, revenues are up 32% to $375 million.  Net income has grown 128% year over year to a staggering $132 million.  And earnings have surged 59% to $0.41 per share.

Terrific gains by any measure.

But what I like best about Hecla is the outlook going forward.

Revenues are expected to increase 12% to $556 million in 2012.  And earnings are forecast to jump 33% to $0.64 per share.  That’s phenomenal growth in the mining industry.

In addition to strong growth, the company’s also sports a solid balance sheet.

They’re sitting on over $400 million in cash, with only about $8 million in debt.  In other words, current assets are close to 8x current liabilities.  Clearly, short-term liquidity is no problem for Hecla.

The company also has strong cash flow of $61 million, a 49% increase over the same period last year.  This number is obviously more than enough to cover their small debt.

Clearly, Hecla is in sound financial shape.


Every investment carries some risk and Hecla’s no exception.

One risk is a sustained drop in silver prices.  Lower silver prices could negatively impact Hecla’s gross margins.

Another risk is potentially running afoul of strict environmental regulations.  Such violations could expose the company to substantial fines and penalties.

Lastly, a big increase in production costs could hurt the business.  Net income could suffer even if silver prices go higher.


Hecla is poised for big gains going forward.

Although the shares are up 20% from their 52-week lows, there’s still plenty of room for an upside move.  At the recent price of $5.97, shares are trading 47% below the 52-week high of $11.34.

What’s more, the shares are clearly cheap on a price to book basis.

Right now, the company has a book value of $3.93 per share.  This puts the stock’s price to book at a low 1.5x.  That’s well below the junior mining industry average of 2.4x.

If Hecla traded up to just the industry average, the shares would need to surge 58% from here.

And it gets better…

Hecla is trading at a P/E of just 9.8x, well below the industry average of 15x.  The shares could easily jump 61% as the stock closes the gap.

Based on our analysis, we see this stock trading up to at least $10.00.  Grab your shares of HL now for potential gains of 68%.


BUY Hecla Mining (NYSE: HL) up to $7.16 per share.

Recent price is $5.97.

Use a stop-loss of $3.00 on this position.

Don’t forget your position sizing and stop-loss rules.


Portfolio Update

  • Magnetek (MAG) has recently gone through a 1 for 10 reverse-split.  This means the share price will increase by 10x.  In addition, you’ll receive 1 new share for every 10 of the old shares.  Continue holding MAG for now.

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