Miners have been out of favor with investors for the past year or so as the falling price of gold and continual write-downs have sent stock prices to rock-bottom levels. However, while the majority of the sector is useless, with most companies suffering horrendous cash burn and rising debt, there are a few diamonds in the rough.
The tiny South African producer
Harmony Gold Mining Co. (ADR) (NYSE:HMY) is a gold mining, exploration and processing company with operation in South Africa and Papua New Guinea. So far this year the company’s stock is down 50%, but this presents an opportunity. In particular, Harmony Gold Mining Co. (ADR) (NYSE:HMY) is now trading at only 44% of the value of its net assets and the company is sitting on a net cash position of $62 million – 2% of equity but worth $0.77 per share giving some cushion to further share price falls. However, it is not just the strong balance sheet that makes Harmony attractive.
Harmony Gold Mining Co. (ADR) (NYSE:HMY) is cash-flow positive, which is a very rare occurrence among gold and silver miners nowadays. Adjusting for financing activities, Harmony produced a free cash flow of $143 million during Q1 this year and $174 million for the whole of 2012. This strong free cash flow has allowed Harmony Gold Mining Co. (ADR) (NYSE:HMY) to improve its total net cash position from $20 million to $62 million over the last five quarters alone.
Still, while Harmony Gold Mining Co. (ADR) (NYSE:HMY) is cash generative, the company is still a relatively high-cost producer with all-in costs averaging $1,446/oz. for the first six months of the year. To some extent, losses have been cushioned by a falling rand. In particular, during the first quarter, the average gold price fell 5% while the company’s realized gold price in rand fell only 2%. Management is proactive, however, and is driving to cut costs by 20% based on the falling price of gold.
The century-old US silver producer
Hecla Mining Company (NYSE:HL) is another diamond silver producer. The company is over 100 years old. It has been extremely fiscally prudent over the past five years while many other miners have been spending rapidly to boost production while precious metals prices were high. However, Hecla Mining Company (NYSE:HL) is now using its saved cash reserves to acquire struggling competitors. In addition, the company recently issued $400 million in debt, but demand was so high that the issue was increased by 20% to $500 million; rising demand for debt issuance, especially for a silver miner in these troubled times, signifies solid confidence.
Hecla Mining Company (NYSE:HL)’s patience shows in its recent acquisitions. Aurizon Mines, owner of two gold mines in Canada, was acquired for a total of $796 million, a 40% discount to the company’s valuation at the peak of the gold boom in 2011. Moreover, Aurizon is a low-cost gold producer, with the all-in cost averaging $1,147 per ounce, which should significantly boost Hecla’s overall profitability.
Hecla Mining Company (NYSE:HL) is trading at its lowest valuation in 35 years and the company trades at a 20% discount to the value of its net asset value. I estimate debt will be around 40% of equity for this year thanks to the recent Aurizon acquisition, but this level appears sustainable based on the low rate of interest <5% that Hecla Mining Company (NYSE:HL) is paying and high demand for the company’s debt.