Precious metals in turmoil: Opportunities in Hecla Mining, Desert Gold and Kinross Gold

Hecla Mining: Christmas in summer

Hecla Mining is among the commodity stocks with the greatest leverage to the silver price. When the precious metal rises sharply, the US company’s shares rise disproportionately strongly. This is mainly due to the group’s relatively high production costs. But this effect naturally also works in the opposite direction.

At Hecla, these characteristics, combined with already high stock market volatility, have led to a genuine “Christmas tree chart”, or fir tree pattern, in summer. From the July low of around USD 14, the shares initially rose sharply alongside precious metal prices to over USD 21; all in less than five weeks. Then, shortly after, they fell sharply as silver prices declined and sentiment toward the sector soured. The shares are now even trading slightly below the July low. This development was a godsend for traders, but less so for investors.

But what happens next? Much will continue to depend on the silver price. Operationally, the second quarter went extremely well. Hecla reported record free cash flow of USD 136 million, more than double the previous year’s Q2 figure. A total of 4.2 million ounces of silver and around 14,000 ounces of gold were mined.

Further developments will therefore depend primarily on the silver price and cost management. The investment community will learn more on November 3, when the company presents its third-quarter figures. However, Hecla itself is driving its growth. The Keno Hill mine continues to be ramped up. The exploration budget is at a record level of more than USD 50 million. For patient investors, current prices could offer an attractive entry opportunity. However, the shares are likely to remain volatile in the run-up to Christmas.

Desert Gold: The crucial phase is under way

Nothing should go wrong now. At Desert Gold, everything is geared toward starting production at the Barani gold mine, with full production capacity set to be reached as early as the first quarter. This is admittedly about three to four months behind the original schedule, as GBC Research analysts noted. Nevertheless, the path to commissioning now appears clear.

It was not entirely straightforward. Barani is in western Mali. The gravity processing plant, with a capacity of 200 tonnes per day, was delivered from China to the port of Dakar in Senegal. This happened only in August and was therefore delayed. All necessary equipment and materials have now arrived at the site. In addition to assembly, Benhope Services SARL is now commissioning the plant and training staff. Improved access to the project site makes the remaining work easier to plan, according to GBC. CEO Jared Scharf explained the current commissioning status and upcoming drilling work at the recent International Investment Forum (IIF):

With the start of production, Desert Gold Ventures is evolving from an explorer into a gold producer. This should also be accompanied by a share re-rating in the coming quarters. It is crucial that there are no further delays before commissioning and that production can be ramped up as planned.

The Canadian company currently has a market capitalisation of just under EUR 30 million. GBC analysts have set a price target of CAD 0.93 for the stock, which is currently trading at CAD 0.13.

Kinross Gold: Player or takeover target?

With a market capitalisation of around USD 27 billion, Kinross Gold is certainly no lightweight among gold producers. With now six active gold mines in Brazil, the US, Mauritania and Chile, the Canadian company is broadly positioned and is further expanding its diversification. It is developing the major Great Bear project in Canada as well as another huge deposit in Chile’s Maricunga region.

With a cash cushion now standing at USD 1.9 billion (as at the end of June), management certainly sees itself as an active player in the market. Meanwhile, any larger producer could see Kinross as a potential acquisition. It could then focus on its preferred regions and spin off or sell the other assets. Newmont has already demonstrated this after acquiring Newcrest Mining. With the top producers currently awash with cash thanks to high profit margins, this scenario is by no means far-fetched.

But it is also a fact that Kinross treats its shareholders well. It typically returns 40% of free cash flow to shareholders through dividends and share buybacks. Between April and June alone, it bought back its own shares worth around USD 230 million. Given its high profit margins and stable cash flows, most analysts are bullish on the shares. Some price targets exceed CAD 50, representing more than a doubling from the current level.

Conclusion

With Hecla Mining, investors can speculate on a silver price comeback, albeit with high leverage. Desert Gold is currently working to move directly from explorer to producer. If it succeeds, a re-rating of the shares is on the cards. Kinross is one of the best-positioned gold producers in terms of its balance sheet and costs. Those who expect gold prices to rise over the long term are unlikely to go wrong here.

Stockhouse does not provide investment advice or recommendations. All investment decisions should be made based on your own research and consultation with a registered investment professional. The issuer is solely responsible for the accuracy of the information contained herein. For full disclaimer information, please click here.