Hecla closes Lucky Friday for one year

Mining analyst Chris Lichtenheldt of UBS Investment Research has cut his 12-month target price on Hecla Mining (HL-N) to US$8.00 per share from his earlier forecast of $9.85 per share after the silver producer announced it has closed its Lucky Friday mine until early 2013.

Following a rock burst on Dec. 14, the federal Mine Safety and Health Administration ordered Hecla to close the mine. Their subsequent review found there is a build-up of concrete-like substances on the walls of the Silver Shaft and on Jan. 11 MSHA ordered the company to close the shaft to remove the material.

Hecla estimates that it will take until the end of 2012 to fix the problem and now expects its silver production this year will be about 7 million ounces, down from its earlier forecast of 9 million ounces. The mine is expected to produce silver for decades, according to management.

The silver shaft extends one mile from and is the primary access to the Lucky Friday mine. The sand and concrete material that needs to be removed from the shaft has built up over a number of years and is expected to be removed primarily by power washing, the company says. In the meantime, the company has also put on hold plans to build the No. 4 shaft and bypass around the rock burst.

Lichtenheldt of UBS says he assumes the mine will remain closed until the second quarter of 2013 but believes that fixing the problem will be straightforward and maintains his buy rating on the stock.

“While a mine closure prompted by an MHSA review will be of ongoing concern for the market, we have no reason to believe the issue will not be resolved as planned,” he writes, adding that the problem “is not expected to be a complicated issue to resolve, but is time consuming.”

Hecla estimates the impact on 2012 cash flow will be in the range of US$20 million in total, Lichtenheldt says, but he believes the figure will be about US$40 million “as our forecast metal prices drove cash flows that were higher than expected capex.” (Hecla had planned to reinvest all cash flow into its expansion project, Lichtenheldt explains, which is now on hold.)

“Management was asked if they would be open to a takeout given the stock price has suffered dramatically over the recent past and could be appealing to acquirers,” the analyst writes. “Management indicated they are unlikely to be receptive to offers near current trading levels, given they believe the shares are worth something in the “teens”…However, they stated any offers would be reviewed appropriately.”

In New York at presstime Hecla was trading at US$4.63 per share within a 52-week range of $4.25-$11.08. The company currently has a market cap of about US$1.3 billion.