With the silver price recovering and reduced costs Hecla mining performed well in 2009. The group also became debt free at the end of the year and increased metal production. As such revenue hit $312m against $204m last year producing net income for stockholders of $54m. Exploration success and continued mine development also looks set to increase production in the long-term. With the outlook for silver continuing to be positive we therefore rate the group a buy.
With a flight to precious metals and a return to economic growth silver has performed well in the past year. This followed a sell-off in the commodity in late 2008, after the Lehman crisis, which pushed the price of silver below $10/ounce for most of Q4 2008.
In 2009 the price has been recovering and has recently has been trading above $19/ounce. However, this volatility masks the fact that the average prices for silver, in both years, have actually been fairly close. The average silver price in 2008 came in at $15.02/ounce while in 2009 it was only marginally lower at $14.65/ounce.
The key driver for demand of the commodity is industrial applications as this consumed more than half the total fabrication for silver in 2008. It includes batteries, bearings, brazing/soldering, catalyst and electronics (silver is a good electrical conductor). Photography demand made up 12.5% in the same year while Jewellery came in at 19%. The implied net investment demand was 6% while a year later in 2009 the silver ETF grew by 40% to 305m.
Clearly, therefore, the developing world will see increased demand for goods that use silver as part of their components while more middle class consumers will increase jewellery demand. By contrast, the supply of silver fell from 916m/ounces in 2005 to 888.4m/ounces in 2008. As such the silver price looks well supported in the medium term.
Hecla mining is the largest US producer of silver and also has the lowest cash costs. Production in 2009 came in at 10.9m ounces of silver which was a jump of 26% on the prior year while proven and probable reserves of silver hit 140m ounces. The total average cost per ounce came in at $1.91 in 2009 which was a 50% fall on 2008.
In 2009 silver generated 39% of the revenue at the group while Zinc was the next biggest contributor at 27%. Lead and Gold both produced 17% of revenues each. As such the group is the second largest producer of zinc in the US and the third largest producer of lead.
Looking at the weekly chart of Hecla Mining we can see that since hitting a low of $0.99 on the 14th of November 2010 the share price has appreciated impressively reaching a 52 week high of $7.97 on the 4th of December 2009. This has formed a solid uptrend that is currently being tested.
We can see that the recent price advance found resistance at the 200 week moving average. Since then we have seen a pullback that looks to have found support at the confluence of support provided by the uptrend and horizontal support around the $5 level. We saw a bearish cross on the weekly MACD but this currently looks like it may reverse.