In a July 24 research note, CIBC analyst Cosmos Chiu reported that Hecla Mining Co.'s (HL:NYSE) acquisition of Klondex Mines closed the previous day. CIBC resumed coverage on the company with a Neutral rating and $4.25 per share price target, down from $4.75 per share, as "acquisitions with a share component can take some time to digest and for the acquirer's share price to recover." Hecla shares are currently trading at around $3.34.
However, CIBC views the transaction as being favorable for Hecla. Chiu discussed its positive implications and Hecla's plans for its new assets. Hecla paid a 1.2x price:net asset value multiple for Klondex. The deal immediately added $0.10 per share to the company's cash flow, or boosted cash flow per share by greater than 20%.
What the precious metals miner acquired in Klondex were "assets with high upside potential in Nevada," the high-grade Fire Creek mine, the Hollister mine, and the Midas mill and mine. They "fit well into Hecla's core competency of high-grade narrow vein mining," noted Chiu. Through a spinout, Hecla disposed of Klondex's "problematic" True North mine in Manitoba. True North had not had a positive free cash flow quarter since Klondex had acquired it in 2016 whereas the Nevada assets had generated about $20 million in free cash flow in Q1/18.
The acquisition "adds profitable gold production ounces" to Hecla's portfolio. By 2019, from the Klondex Nevada assets alone, CIBC estimates a production increase to 185,000 ounces (185 Koz) from 174 Koz. It forecasts the combined Hecla to generate about 600 Koz of gold equivalent annually after a full year of production. "This makes Hecla one of the more substantial players within the intermediate precious metals producer universe and could be a positive factor in generating investor interest in the company," Chiu pointed out.
At Fire Creek, Hecla aims to grow the current resource and reserve, which are currently sufficient for a mine life through at least 2023. "We expect Hecla will be able to convert resources into reserves, while also achieving success at the regional targets including Zeus," Chiu indicated.
At Hollister, Hecla will continue improving ore recovery at Midas via additional leach tanks and carbon screens. The latter alone has already taken recoveries to greater than 80%, just under the 85–90% goal.
The Hatter Graben target at Hollister, which offers potential exploration upside, could be "a game changer," added Chiu. Mineralization there remains open in all directions.
Chiu concluded that "in Nevada, Hecla can leverage its operational expertise in underground mining and is in a position to increase the high-grade reserve/resource at Fire Creek while continuing to improve the recoveries at Hollister."
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Disclosures from CIBC, Hecla Mining Co., July 24, 2018
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Important Disclosure Footnotes for Hecla Mining Company (HL)
· Hecla Mining Company is a client for which a CIBC World Markets company has performed investment banking services in the past 12 months.
· CIBC World Markets Inc. has received compensation for investment banking services from Hecla Mining Company in the past 12 months.
· CIBC World Markets Inc. expects to receive or intends to seek compensation for investment banking services from Hecla Mining Company in the next 3 months.
