INVESTMENT COMMENT Lucky Friday puts Hecla on buy list

One of North American mining’s most senior citizens is back in favor with Merrill Lynch’s New York-based Global Securities Research department.

After reopening its Lucky Friday silver mine, Hecla Mining Co. has been reinstated on Merrill Lynch’s recommended list as an attractive vehicle offering a high degree of protection from inflation.

In his Aug 31 report, Merrill Lynch vice-president Daniel Roling has given the Hecla shares an above-average rating for the intermediate term. He also rates the issue as a definite long-term buy.

Incorporated as a Washington State corporation back in 1898, Hecla started its mining life in the Coeur d’Alene mining district of northern Idaho where the company is still active.

Hecla’s primary operations are the Lucky Friday, Escalante and Republic mines, the Kentucky- Tennessee Clay Co. and the Colorado Aggregate Co. Hecla also has substantial interests in Asarco Inc.’s Galena and Coeur silver mines.

After 14 months on hold, Lucky Friday reopened under a concessionary labor agreement on June 1. Located northeast of Mullan, Idaho, in the Coeur d’Alene district, reserves at Lucky Friday are sufficient for a 20-year mine life. However, Hecla says it doesn’t have the figures to support that prediction. Underhand longwall

Having installed a new $42-million(US) 6,000-ft production shaft at Lucky Friday, the company is expected to test a new underhand longwall system when full production begins in early 1988.

Designed to prevent rockbursts at deep levels, the longwall system utilizes diesel equipment and a “mining down” method which Hecla says will increase production and reduce costs by 15%.

While Lucky Friday was mothballed due to lower silver prices, Hecla’s Escalante silver mine in southwest Utah has been producing at the rate of 2.3 million oz per year. Reserves at Escalante are sufficent for two more years, but an accumulation of stockpiled ore will keep the mine running until 1991, the Merrill Lynch report says.

The Galena and Coeur mines in the Silver Valley area of northern Idaho operated by Asarco, contribute between 600,000 oz and 700,000 oz of silver to Hecla’s annual output which last year totalled 4,371,000 oz.

Silver, zinc and lead have been Hecla’s traditional mainstay’s but through its interest in a North West Territories rare earths deposit, Hecla is also active in the high growth metals area, which includes beryllium, yttrium and rare earths. Rare earths

Under the terms of a recent agreement, Hecla is earning a 50% interest in Highwood Resources’ Thor Lake beryllium-rare earth deposit by bringing the property to production.

As reported (N.M., Oct 6/86), capital costs at Thor Lake are estimated at $30 million and reserves stand at 1.6 million tons grading 0.85% beryllium oxide (including 435,000 tons of 1.4% beryllium oxide, 0.26% yttrium oxide, appreciable levels of niobium and other rare earth elements). While the company’s history makes Hecla one of the continent’s more enduring silver producers, it is Hecla’s strong balance sheet that has attracted Merrill Lynch.

“We believe that Hecla will report a modest profit of 10 cents per share in 1987,” says Roling. “We are estimating a swing in cash flow from a loss of 46 cents per share in 1986 to a 50 cents -per-share profit in 1987.”

As an indication that Hecla will live up to Roling’s expectations, the company reported a third quarter profit of $9.6 million or 35 cents per share on revenues of $30 million.

That compares with a loss of $2 million or 7 cents per share on revenues of $16 million during the same period last year.

Net income for the first nine months of 1987 was $5.7 million or 21 cents per share compared with a net loss of $6.8 million or 25 cents per share during the first nine months of 1986 Lucky Friday

According to Hecla Chairman Arthur Brown, these results were due to record gold production and a resumption of operations at the Lucky Friday mine. In the first nine months of 1987, Hecla’s Republic mine in Washington State produced 53,288 oz of gold, up 62% over the same period in 1986.

Since Hecla is apparently succeeding in its efforts to diversify away from silver, Merrill Lynch sees a positive long term outlook for the company. The company’s long- term debt currently stands at $16 million.

“It is our opinion that Hecla’s management will maintain a conservative financial posture with a low debt-to-equity ratio and positive cash flow over time,” says Roling who forecasts per share earnings of 85 cents in 1988 and a price earnings ratio of 24.4.

Hecla shares were trading recently on the New York Stock Exchange at $11.88 in a 52-week range of $26.63 and $9.88.