We believe Hecla Mining (HL) is one of the most attractive silver stocks available today due to its heavy geographic weighting in the low-risk North American continent, hedging practices meant to mitigate risks, aggressive cost-cutting program, and cheap valuation.

Hecla’s portfolio consists of 7 operating mines, 2 development sites, and multiple exploration projects, most of which are in North America and the remainder in South America. It’s main silver mine (Greens Creek) reported 19% year-over-year production growth in the second quarter. However, its main gold mine (Casa Berardi) reported a 32% year-over-year production decline.

That said, Hecla could generate strong returns for shareholders going forward, through earnings growth and dividends.

Recent Downturn Could Be Short-Lived

Its productivity decline is one of the reasons that has led to the stock’s overall underperformance relative to the broader mining sector. Another reason is that the company’s Mexican operations at San Sebastian are hurting its overall results. The San Sebastian mine’s silver productivity declined by 17% and its gold productivity declined by 8% year-over-year in the second-quarter results.

The third reason is that the company’s investments in three different Nevada mines have all fallen short of expectations thus far, moving management to cut operational expenditures there.

Fourth, is the continuing two-year-old labor union wage disagreement strike at its Lucky Friday mine in Idaho, which has significantly impaired production at the site. This strike is especially significant because the mine is the company’s second-best silver asset.

The final reason that the stock is underperforming is due to the balance sheet. They have over $530 million of long term debt on the books and just $10 million in cash on hand. The debt to current assets ratio is 3.7 times; a very high burden for a company with so many issues. Most dangerous of all, its debt is due at the end of 2021.

That being said, the company still has plenty of positives which should excite long term investors. First, the company’s concentration in North America gives it very little geopolitical risk, which as larger global investors such as Barrick can attest, is one of the quickest ways to wipe out billions of dollars of shareholder money. Since Hecla is not exposed to very little of this type of risk, it stands little chance of having to abandon a project worth billions of dollars on account of the region’s government.

Hecla also minimizes its downside risk by purchasing in put options on gold and silver at prices of $1,400 and $15.13 per ounce, respectively, with an expiration date in the first quarter of next year. Given the company’s smaller size and weaker balance sheet than many of its larger peers, this strategy is prudent and makes the company a fairly low-risk operation.

Management also has a good reputation for living within its means by running the company on a free cash flow positive basis over the past three-plus years. In order to continue this trend while accounting for the disappointing production numbers across several assets in the portfolio, Hecla is slashing spending on development and payroll. Management claims to see numerous additional opportunities to cut costs across the organization, such as reducing water consumption, improving recoveries, and reduce exploration expenditures. They expect their workforce to decline by 25% in Nevada this next year.

The Bottom Line

While Hecla is certainly not low risk due to its debt and numerous operational issues, it has enormous upside and does lack some of the risks that typically plague miners, such as geopolitical and commodity pricing. If management can refinance its debt, get Luck Friday back online, and/or see precious metals prices continue their recent momentum, it will likely significantly outperform peers moving forward. On the other hand, if operational woes continue for the indefinite future and precious metals prices stagnate, they could find it challenging to refinance their debt.