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 Company (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 Mining Company (NYSE:HL) 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 Ltd.(USA) (NYSEMKT:AZK).
Hecla Mining Company (NYSE:HL) made a proposal to Aurizon Mines Ltd.(USA) (NYSEMKT:AZK) 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 Mining Company (NYSE:HL) 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 Mining Company (NYSE:HL) 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 Mines Ltd.(USA) (NYSEMKT:AZK) 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 Mining Company (NYSE:HL) 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 Corp. (USA) (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 Corp. (USA) (NASDAQ:PAAS) 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 Corp. (USA) (NASDAQ:PAAS)’s strong cash position, 4.1% dividend and attractive 11.2 forward P/E make it a very interesting stock to consider.
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.
Vladimir Zernov has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Vladimir is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Hecla Boosts Its Assets With This Purchase originally appeared on Fool.com is written by Vladimir Zernov.
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