Hecla sees potential in junior explorers

VANCOUVER — The market landscape has shifted for juniors with exploration-stage assets. And though equity markets remain tough, there are opportunities for producers like U.S.-based Hecla Mining (NYSE: HL) that are looking to get involved early in promising projects.

The business model is not necessarily a new one, but it is more relevant today owing to limited equity-raising opportunities and production-oriented companies that are preserving cash and re-focussing on core assets. As valuations on early stage projects have dropped, miners like Hecla are looking towards share-based investments in juniors that can enhance development pipelines, while limiting the need to spend a lot of cash on exploration.

“It’s a strategy we’ve actually been entertaining and thinking about for a number of years, but it wasn’t something we participated in until 18 months ago,” senior vice-president of exploration Dean McDonald says during an interview at Hecla’s Vancouver offices.

“There were a lot of things we thought had potential out there, and when we looked at the valuations it started to make sense. Three years ago I would have said the exact opposite. Why would you invest when these types of junior deals are overblown? You could take the Yukon plays over the past few years as examples. Some of the market capitalizations on early stage exploration just did not add up,” he says.

And that newly instituted strategy has seen Hecla invest US$8 million in a trio of junior explorers over the past 12 months. McDonald explains that the recent rash of writedowns and project delays amongst producers has changed the way markets view growth pipelines. Whereas investors over the past few years were more focused on near-term expansion via asset acquisition, they are now showing an appetite for more discretionary growth by way of exploration and measured development.

“We’ve always been in tune with the market. We didn’t necessarily start with an active list of projects, but we’ve always been evaluating these opportunities on a case-by-case basis,” says vice-president of corporate development Don Poirier. “As mentioned, the market plays a big role in these types of investments. We didn’t want to run these programs ourselves, but we saw a lot of value in the expertise of some of these management groups. As the markets came down we saw people with quality projects and no access to capital or equity markets, so we started looking at providing those lifelines.”

Hecla’s initial foray into the junior sphere was in August 2012, when it invested US$3.2 million in Vancouver-based Dolly Varden Silver (TSXV: DV; US-OTC: DOLLF), which is exploring a historic silver area in the upper Kitsault Valley, where Barrick mined the Eskay Creek volcanogenic massive sulphide (VMS) deposit for gold, silver, copper and zinc until 2008. Hecla purchased 20 million shares in Dolly Varden at 16¢ per share, which resulted in the major owning a 20% stake.

(The topic of McDonald’s doctoral thesis was the district’s long-running Silbak Premier epithermal mine, and he says the Eskay Creek belt still intrigues him with its “huge geological potential.”)

The capital infusion from Hecla  allowed Dolly Varden to carry out two drill programs and rehabilitate the historic Torbrit underground silver mine.

Dolly Varden has developed a structural model for the project, with fieldwork in 2013 identifying a long-lived fault system, which acted as a hydrothermal conduit for phases of silver mineralization, including late-stage native silver that yielded some of the highest-grade silver mineralization at Torbrit.

On Nov. 8 Dolly Varden released results from a 10-hole program at Torbrit that targeted the DVT exhalite horizon. Highlights include 11.5 metres grading 674 grams silver per tonne, 0.41% lead and 0.48% zinc from 211 metres depth in hole 13-14; 7.7 metres of 621 grams silver, 0.7% lead and 0.11% zinc from 124 metres in hole 13-06; and 17.2 metres of 155 grams silver, 1.4% lead and 1.65% zinc from 154 metres in hole 13-11.

“I’d always heard of the Dolly Varden, though I hadn’t looked at it too closely. I now understand that due to rather questionable ownership, it really did not advance during that initial Eskay rush,” McDonald says. “We actually knew the principals in Dolly Varden, and when we saw they had picked it up I was really excited about the project.”

Hecla’s next move was a US$2.5-million investment in Canamex Resources (TSXV: CSQ) in November 2012. The junior is earning a 100% ownership in the historic Bruner gold-silver project in Nevada, 72 km northwest of Kinross Gold’s (TSX: K; NYSE: KGC) Round Mountain open-pit mine. Hecla picked up 14 million Canamex shares at 18¢ apiece for a 14.8% stake.

McDonald says that Hecla is not too constrained corporately by deposit type or commodity. He points out that the company works with VMS deposits at its wholly owned Greens Creek silver mine in Alaska’s Panhandle,  fissure vein-type mineralization at its Lucky Friday silver mine in northern Idaho’s  Coeur d’Alene district, and epithermal deposits at its development-stage San Sebastian silver project in Durango, Mexico. The company also waded into Archean greenstone belts with its recent US$796-million acquisition of Aurizon Mines and its Casa Berardi gold mine complex in Quebec.

“The only thing we haven’t done thus far is a porphyry deposit, so I don’t think we fall into one category in a geological sense,” McDonald says, adding that Hecla does prefer jurisdictions in the Americas. “Our focus has typically been narrow-vein mining in underground scenarios. I mean, over the history of the company we’ve had open-pit mines that have been successful, but we do see our key areas as being underground.”

Hecla’s most recent investment saw it take an interest in another historic silver project in northern B.C. In February Hecla subscribed for 17.25 million shares in Vancouver-based Brixton Metals (TSXV: BBB; US-OTC: BXTMF), which is exploring its Thorn polymetallic project 130 km southeast of Atlin. Hecla wound up with a 20% equity interest in Brixton, while the junior received US$2.6-million cash.

The investment followed high-grade intervals at Thorn’s Oban breccia zone, including 95 metres of 904 grams silver equivalent from surface in hole 11-60, and 123 metres of 406 grams silver equivalent from 44 metres depth in hole 12-84.

Hecla’s investment funded 4,600 metres of drilling for Brixton in 2013. In August the junior released high-grade intervals, highlighted by 1.3 metres of 1,275 grams silver equivalent from surface in hole 13-101.

As a result, Brixton raised another US$1 million from mining financier Rob McEwen in October  even as Hecla pitched in another US$426,000 — all of which allowed the junior to get its drill back in the field before the end of the season. (for a full site visit report, see T.N.M., Nov. 11–17/13)

“All of us are aware of what’s going on in terms of new stories and discoveries. People move around this business, and our team has a lot of experience in the industry. You tend to identify the good people, and come to know who manages companies well,” McDonald says. “At that point the ingredient was: ‘Did they have a property, though it may have been early stage, that had the potential to be a mine?’ The basis of what we’re trying to do is put oursel
ves in a position where we’re knowledgeable about it, and it fits our criteria.”

And according to McDonald and Poirier, the search for promising junior investment will continue for Hecla. Overall, they said, the company is focused on preserving its operating cash flows so that it can fund growth and development internally, and still maintain a strong balance sheet.

Hecla registered cash flows of negative US$5.2 million during the third quarter, and reported cash and equivalents totalling US$238 million in September.

Over the last 52 weeks Hecla shares have traded between $2.65 and $6.15, and  they closed at $3.04 per share at press time. There are 343 million shares outstanding, for a $1.1-billion market capitalization.