Anatomy of a Silver Legend: The Next 120 Years for Hecla Mining
Feb 7th 2012 2:00PM
Updated Feb 7th 2012 2:02PM
It's right there in Sir Isaac Newton's First Law of Motion: An object in motion will tend to stay in motion. Hecla Mining (NYS: HL) has been a mover and a shaker in the silver industry for 120 years; and barring some unforeseen "external force" -- to put it in Newtonian terms -- I think it's reasonable to look forward into Hecla's future with a similarly long-term lens.
A number of forces have combined to reduce Hecla's momentum here in the near term, most notably the recent stoppage at the Lucky Friday mine to conduct maintenance work on the mine's primary shaft. But for investors who measure time at a more patient pace than the frantic movers and shakers of the equity market, I believe the resulting retreat in Hecla's shares presents a Foolish bargain for a portfolio of assets that could potentially sustain profitable silver production for decades yet to come. We examined those assets in some detail through the first three installments of this in-depth series. As long as you promise to return here, please review the entire series beginning with the first installment here.
Hecla did not make my list of the top 10 silver stocks for 2012, but as I extend my gaze into 2013 and beyond, I do think the legendary miner demands serious consideration from silver investors. Aurcana (OTC: AUNFF) offers perhaps the greatest growth story in silver today, and Fortuna Silver Mines (NYS: FSM) is mounting its own strong bid to swiftly join Hecla as a powerful mid-tier silver producer. But the scale of Hecla's exploration potential -- beckoning against the tide of a woeful trailing stock performance that has my bullish CAPScall from all the way back in 2008 badly underperforming the S&P 500 -- frankly places the undervalued miner in a league of its own.
Meanwhile, our survey of Hecla's property portfolio within this series is a reminder that Hecla retains an elevated likelihood of exploring its own way into meaningful production growth. I have marveled at the outstanding organic growth potential from my favorite gold miner, Primero Mining (NYS: PPP) , but it's Hecla that stands out among the primary miners of silver.
In this fourth installment of this ongoing series, I will present segments of my recent interview with Hecla CEO Phillips Baker Jr. in which he discusses his long-term outlook for silver demand at large, and the role his company might play in satisfying that demand for generations to come.
Christopher Barker: Hecla has been mining silver for 120 years. Will it still be mining silver 120 years from now?
Phillips Baker Jr.: That's a particularly interesting question. And the answer relates not just to whether Hecla has the assets to make that occur, because I think we do with these four properties we have and the things we will acquire; you will see us operating for that period of time. But what's more important is the demand for the metal is going to continue to grow in ways that we didn't expect. And what's going to drive that is the unique nature of the metal itself. In addition to the monetary nature of the metal, you have these fundamental characteristics that cause it to be used in all sorts of products, and most of them are products that we didn't have 20 years ago: smartphones, tablets, computers, photovoltaic cells, clothing that now has silver in it, bandaging ... none of those things existed 15 to 20 years ago to any degree. And all of those things are growing, and they are growing simultaneously.
And what is clear to me is that there will be new uses tomorrow that are not being contemplated despite how great those are. And I'll give you an example of one that appears to be happening, but we're still at the early stage. And that's the radio frequency identification or RFID tags. These things are incredible because they are driven by the nature of silver. The electrons in the antennas, as I understand it, get excited by the radio waves, so that even without a power source for that tag, it has the ability to transmit data from that tag. Up to this point, the Wal-Marts of the world have been testing this, but they're now telling their vendors that they want them on every item they sell. So it's conceivable this could revolutionize the way in which items are purchased, inventoried, etc.
So when you ask me whether we will be mining silver 120 years from now, when you consider those sorts of applications ... the demand for silver today is 1 billion ounces per year. I don't know where demand will be 120 years from now, but I suspect it will be a multiple -- if not exponential -- increase in the number of ounces. I like gold, but because of the unique characteristics of silver -- it's the most conductive metal, the most reflective metal, it has the greatest heat characteristics, its biological applications -- I'll still want to produce gold, but man, silver is still our central focus.
Barker: Along those lines, is Hecla the right silver vehicle for the sort of ultra-long-term, generational investment that one might associate with a 120-year-old company. Is this the kind of stock that you hold onto and pass down to your children and grandchildren?
Baker: If you think back to about 1850, and track the progression of demand through the era of photographic demand, nobody really understood where it would go. But it remained a reasonably valuable product that was produced and really drove the development of the West. Given that I'm suggesting that we could have a similar pattern of demand growth repeating itself multiple times, silver belongs in the category of something that you want to have exposure to for you, your children, your grandchildren, and beyond. Now, what you want to do is to have exposure to a company that produces that metal, and you want to have exposure to a company that has great, low-cost assets, because despite that demand increase that you're going to see, you'll have periods of time when the price will go up and down. Don't get the impression I'm suggesting the price will only go up. It will be a function of the economy and of supply. So you want to have low-cost assets, and you want to have assets that are long-lived. I look at these assets -- and while I won't suggest that these assets will last for 120 years -- they are in districts where there could be mines that are running for 120 years. So to have this as a long-term investment for you, your children, and your children's children, I can't imagine a better-positioned silver company to do that.
Barker: I added to my own stake recently, and that's the mindset I had while doing so. Along those same lines, could you discuss Hecla's new dividend policy?
Baker: We just announced the dividend during the third quarter because we had that litigation to deal with, but we would have liked to have done it earlier. With that now behind us, we have initiated a dividend policy that is tied to the silver price beginning at $30 silver. We think that's a great way to go, where we have the ability to pay that dividend, and see it rise dramatically if the price of silver increases further. In this relatively higher silver price environment, I think the dividend puts us in a position to return that money to shareholders. In a lower-price environment, the board can still make a dividend, but we have the flexibility to make that determination.
Barker: Which competitor do you most admire, and why?
Baker: Fresnillo (OTC: FNLPF) has a spectacular asset in the Fresnillo mine. That's a mine that operated for 450 years on the wrong vein. My uncle was the chairman of the Fresnillo company at the time, and they had a belief that the orientation of the vein was in a particular direction. And it turns out that where they're mining now, and have been mining for the last 30 years, was perpendicular to that. And the only reason they found it was because the drilling they did was mis-surveyed and they drilled in the wrong direction and they hit the right vein. They were a great asset for 400-plus years, and it's a great asset today. And they do a spectacular job of running that mine and producing the ore. It really is first-rate, and any mining company would find things that they could learn from those guys.
Barker: What about the industry will most surprise observers over the next five years?
Baker: This underlying fundamental demand for silver. I think even within the industry, we don't perceive it. I think that what we've seen over the last decade is just the tip of the iceberg over what we're going to see in the future, and the reason I say that is because we have more and more people living in the developed world. Those people look for ways to further improve how things are done -- improve their lifestyle -- and no matter how you look at that process it involves more silver.
Barker: What about Hecla will most surprise the market over the next several years?
Baker: The nature of these deposits that we have. I do think that our target to grow our production over the next five years is very achievable. I think the Lucky Friday will come back stronger than before. I think that one or more of those properties will also be in production over that time frame, and I think the market clearly has no perception of that, so I think they'll be very surprised by it.
Looking for more ideas? Download The Motley Fool's special free report " The Tiny Gold Stock Digging Up Massive Profits ." Our analysts have uncovered a little-known gold miner that we believe is poised for greatness; find out which company it is and why we strongly believe in its future -- for free!
- Add Hecla Mining to My Watchlist
- Add Fortuna Silver Mines to My Watchlist
- Add Primero Mining to My Watchlist
At the time this article was published Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Aurcana, Hecla Mining, and Primero Mining. 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.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.