Hecla Boosts Its Assets With This Purchase
Vladimir is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Precious metals have been under pressure this year. Silver has led the way, down 25%. The pressure on miners has been even more severe. For some companies, this environment is very tough. For others, like Hecla Mining (NYSE: HL), it’s time to go shopping.
Boosting the asset portfolio
Falling silver prices have led to falling silver companies' prices. Hecla is down 35% year-to-date. However, the prices of silver-related assets have fallen too, and Hecla is exploiting this fact. There is no better time to add assets to your portfolio than when the prices are depressed. So the company's management has decided to pull the trigger and buy Aurizon Mines.
Hecla made a proposal to Aurizon shareholders back in the winter. On May, 9, the proposal was approved. There was a last administrative hurdle to deal with, and, finally, Canadian authorities approved the transaction between Hecla and Aurizon.
Hecla was mostly a silver producer before the deal. Silver accounted for 54% of Hecla’s revenue, while gold was the source for 14% of the revenue. Hecla also produces zinc and lead, which account for 32% of the revenue. After the purchase, this proportion would change. Hecla estimates that gold would be 39% part of its 2013 revenue, while silver’s share would slide to 38%.
Is this a smart move?
Aurizon is a gold miner whose main asset, Casa Berardi mine, is situated in Canada. Aurizon has finished its first quarter with revenue of $43.2 million from 26,200 ounces of gold sold. The company had $189 million in cash and was debt-free. Hecla is counting on the fact that Casa Berardi would be able to produce approximately 150,000 ounces of gold with about a 50% cash margin. This would bring $212 million of revenue in current gold prices. Hecla estimates that the life of the mine would last for more than a decade.
Hecla has stated that it has a strategy of becoming a diversified miner. The purchase of Aurizon fits perfectly into this strategy. Gold prices have fallen 15% year-to-date, showing a better performance than silver prices. I think that both Hecla and Aurizon shareholders should be happy with this deal. In the current environment, one wants to be diversified and flexible, and that’s exactly what the deal brings.
Where did the money come from?
Hecla issued $500 million of 6.9% senior notes due 2021. Hecla estimates that it would have more than $300 million in cash at the close of the acquisition, which would give the company the power to continue to search for new assets. If we think about the current situation in silver mining, it is clear that Hecla has scored a very good deal by offering its notes. It had received long money for a reasonable price. More, it has not compromised its cash position, which would count if silver prices fell further.
Securing the deal now was important because there are other silver miners that have excellent cash positions and can go shopping as easily as Hecla. A good example is Pan American Silver (NASDAQ: PAAS), which has $490 million in cash and short-term investments. It is enough to start searching for depressed asset prices. Pan American Silver has stated that it is interested in purchases while asset valuations are depressed. This company is almost debt free, so it can easily raise more cash by offering its debt like Hecla if it gets really greedy. Pan American Silver’s strong cash position, 4.1% dividend and attractive 11.2 forward P/E make it a very interesting stock to consider.
Coeur d'Alene Mines (NYSE: CDE) is another example, with $331 million in cash and cash equivalents at the end of the first quarter. Coeur d'Alene has $307 million in long-term debt and just $6 million in current debt, so this allows the company to search for attractive assets. Coeur d'Alene trades at 10.5 forward P/E. The company states that it is primarily focused on existing operations and its share-repurchase program. It has completed $32.5 million of the $100 million repurchase program. Share buybacks always provide support for the stock, so this is good news. While the company says it's cautious about purchases, it can always change its mind if it finds a tempting asset.
Hecla did the right thing. You should purchase assets when the prices are low. The purchase of Aurizon makes Hecla a diversified precious-metal company. Hecla trades at an attractive 10.4 forward P/E, although I would like to remind you that forward estimates are subject to change and hugely depend on the outlook for silver and gold prices.
The company pays a dividend which yields 0.3%, so small that it could be neglected. It is the growth of the asset base that is important. When the season of low precious-metal prices is over, Hecla will be perfectly ready.
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Vladimir Zernov has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!