North American Palladium 1999 year-end review
North American Palladium Ltd PDL
Shares issued 12,067,724 Jun 15 close $8.75
Fri 16 Jun 2000 Company Review
Mr. Keith Minty reviews the company
In 1999, the company spent $5-million on a very successful exploration
program that ranged from grass roots prospecting to ore definition
drilling. The company expanded its reserves and resources substantially,
discovered 15 new platinum group metal occurrences, and increased its
landholdings within 100 kilometres of the mine to 15,174 hectares. The
results of this work confirmed the company's belief that the full potential
of its Lac des Iles property and the surrounding area has yet to be
realized.
Based on the 50,000 metres of diamond drilling completed in 1999, and a
detailed feasibility study by AGRA Simons, minable proven and probable
reserves at the end of 1999 were estimated to contain 3.9 million ounces of
palladium, as well as significant quantities of platinum, gold, copper and
nickel. Additional resources outside the proposed open-pit shell were
estimated to contain a further 1.1 million ounces of palladium. The Roby
orebody remains open at depth and along strike to the southeast.
The company commissioned AGRA Simons to conduct a detailed feasibility
study of its plans to expand the Lac des Iles operation to 15,000 tonnes
per day from the current 2,400 tonnes per day. The study, completed in
December, 1999, concluded that the proposed expansion is technically
feasible and economically viable.
Based on the feasibility study, the expanded operation is expected to
produce an annual average of 248,900 ounces of palladium, 24,200 ounces of
platinum, 19,100 ounces of gold, plus copper, nickel and cobalt, over an
11-year mine life. The unit cost of accountable palladium production over
the mine life, net of credits and excluding royalty, is estimated at $131
(U.S.) per ounce. The initial capital expenditure of $126.5-million (U.S.)
is expected to be repaid within 2.5 years, based on a conservative price
scenario. The company's plans call for the existing mill to continue
operating until the new 15,000-tonne-per-day concentrator is commissioned
in the second quarter of 2001.
Over the last two years, operations at Lac des Iles have improved
significantly, with major decreases in operating costs and increases in
productivity. In 1999, the amount of ore and waste mined was up 12 per cent
over 1998, and mill throughput increased by 4 per cent. As forecast,
because of the lower-grade of ore in the section of the open pit being
mined, production of palladium, platinum and gold was lower than in 1998,
although copper and nickel were higher. The mill produced 10,286 tonnes of
concentrate (10,843 tonnes in 1998), containing 64,441 ounces of palladium
(84,228 ounces in 1998), 4,744 ounces of platinum (5,535 ounces in 1998),
4,888 ounces of gold (5,079 ounces in 1998), 1.4 million pounds of copper
(1.2 million pounds in 1998) and 973,817 pounds of nickel (914,030 pounds
in 1998).
Revenue increased to $44.6-million from $28.1-million in 1998, because of
the improvement in palladium and platinum prices. Production costs declined
to $24.2-million compared with $25.5-million a year earlier. The unit cash
cost to produce palladium, net of other metal credits and royalties, was
$252 (U.S.) per ounce in 1999, compared with $231 (U.S.) in 1998, primarily
as a result of the lower-grade ore and lower palladium production. The
company recorded a net loss of $5.2-million or 84 cents per share in 1999,
compared with a net loss of $17.5-million or $1.90 per share in 1998.
As the company's plans for expanding Lac des Iles have taken shape, it has
been most encouraging to see palladium and platinum prices rising also.
The palladium price increase has resulted in increasing interest in North
American Palladium, and helped the company with its efforts to raise the
finances for expansion. Early in April, 2000, the company received and
accepted a commitment letter from a syndicate of three Canadian chartered
banks which have agreed to provide a project term loan for $90-million
(U.S.). The company expects to finance the balance of its financing
requirements from the net proceeds of an equity offering. The credit
facility is subject to the usual conditions precedent for a project
financing of this type, including a review of the AGRA Simons feasibility
study by an independent engineer.
A new six-year collective labour agreement ratified by Local 9422 of the
United Steelworkers of America early in March, 2000, will also assist the
company in proceeding with its expansion plans.
The project expansion will increase the current number of employees from
128 to an estimated 250 over the course of construction and concentrator
commissioning. In addition to these mine-site-created employment
opportunities, an estimated 470 full time equivalent jobs will be created
from indirect and induced employment opportunities.
The financial contribution to the city of Thunder Bay and surrounding area
is estimated to be $55.5-million annually for labour, goods and services
over 12.5 years which includes the expansion and closure phases. Total
expenditures on labour, goods and services over the life of the project is
estimated at $785-million.
New smelting and refining agreements with Falconbridge and INCO, effective
April 1, 2000, will result in estimated overall annual cost savings of $114
(U.S.) per dry metric tonne of concentrate over the previous Falconbridge
contract, equivalent to $5-million (U.S.) annually.
The company has secured an end-user supply contract which, subject to the
company arranging suitable financing for the expansion, will see a major
automobile manufacturing company purchase all of the company's palladium
production for a minimum of five years, with an automatic extension each
year subject to mutual consent. The contract incorporates a floor price of
$325 (U.S.) per ounce, substantially higher than the company's anticipated
cost of $131 (U.S.) per ounce and a ceiling of $550 (U.S.) per ounce on 50
per cent of production.
The 2000 exploration drilling program is well under way. As of April 18,
2000, a total of 40 core holes totalling 20,075 metres had been completed.
Program results have been very encouraging. The Shear Ore zone has been
identified to a depth of 650 metres which is approximately 200 metres below
the deepest hole drilled during the 1999 exploration drilling program. The
high-grade nature of Shear Ore is found at depth as intercepts of 32 metres
grading 4.0 grams per tonne have been encountered. Within this zone is
contained a high-grade zone of 10 metres in width grading 10 grams per
tonne.
Exploration drilling of the Twilight zone is very encouraging as a
significant resource is being developed. Palladium assay grades similar to
those found in the open pit are located in the zone. Further evaluation is
required to determine its full potential.
The current exploration drilling has been successful in expanding the
resources of the Roby zone and other zones adjacent to the Roby pit. It is
anticipated that as a result of the current exploration program, the
company will be able to significantly increase the Lac des Iles deposit
resource.
The company is undertaking preliminary initiatives for the expansion
construction program, subject to the completion of financing and approvals
of environmental permits. As a result, the company expects the new
concentrator will be commissioned in the second quarter of 2001.
The company is developing resources that are amenable to open-pit mining,
which offers a number of advantages compared with underground mining.
Higher production will allow the company to achieve lower operating costs.
The new mill has been designed so that throughput could be doubled to
30,000 tonnes per day relatively easily, given an increased reserve base
and additional economic studies with regard to the feasibility of such a
step. The company expects permitting for the expansion to be relatively
straightforward.
The company has budgeted $4.5-million for exploration in 2000. The main
effort will consist primarily of core drilling aimed at delineating the
Roby ore body at depth and along strike to the southeast. This program has
already begun, and the company expects to have three drills operating
throughout the year. The company's overall exploration objective is to
expand its mineral resource by a minimum of 50 per cent. In addition to
improving shareholder value by increasing the resource inventory of
palladium and other metals, the 2000 diamond drilling campaign will provide
additional information necessary for pit design and infrastructure
planning. If the Twilight zone, discovered to the east of the Roby zone in
1999, can be developed into minable resources, the stripping ratio for the
enlarged open pit could be reduced and the company would see further
reduction in its annual operating costs. It will also continue surface
exploration of existing anomalies and new targets in the immediate mine
area. First and foremost, the company's focus is the Lac des Iles
expansion, and secondly, exploration within 100 kilometres of the mine.
LAC DES ILES MINE
At Dec. 31, 1999
Platinum Gold Copper Nickel
Reserves
Proven (10,525,000 tonnes ore reserves,
1.77 g/t palladium, 598,944 contained
ounces of palladium
0.19 0.14 0.067 0.057
Probable (62,683,000 tonnes ore reserves,
1.62 g/t palladium, 3,264,792 contained
ounces of palladium
0.18 0.14 0.065 0.055
Total proven and probable (73,208,000
tonnes ore reserves, 1.64 g/t palladium,
3,863,736 contained ounces of palladium)
0.18 0.14 0.066 0.054
Possible (1,036,000 tonnes ore reserves,
1.83 g/t palladium, 60,954 contained
ounces of palladium
0.20 0.14 0.063 0.054
Resources (in addition to reserves)
Measured (2,081,000 tonnes ore reserves,
1.67 g/t palladium)
0.19 0.12 0.050 0.043
Indicated (18,879,000 tonnes ore
reserves, 1.41 g/t palladium)
0.18 0.12 0.050 0.044
Inferred (2,462,000 tonnes ore reserves,
1.67 g/t palladium)
0.19 0.15 0.066 0.050
Total (23,422,000 tonnes ore reserves,
1.46 g/t palladium)
0.18 0.12 0.052 0.045
The company generated gross revenue from metal sales of $44.6-million in
1999 compared with $28.1-million in 1998. The increase in gross revenue was
directly related to the improvement in palladium and platinum metal prices.
Production costs declined further during 1999 to $24.2-million compared
with $25.5-million in 1998. Tonnes of ore milled increased to 894,168 for
the current year compared with 859,942 in 1998, while concentrate
production declined slightly to 10,286 tonnes from 10,843 in 1998. While
1999 palladium production declined to 64,441 ounces due to treating
lower-grade ore compared with 84,228 ounces in the prior year, contained
copper and nickel quantities improved. Cash costs to produce palladium, net
of other metal credits and royalties increased to $252 (U.S.) per ounce in
1999 compared with $231 (U.S.) per ounce in 1998. The increased unit cost
resulted from processing lower-grade ore, which was partially offset by
operating improvements and higher credits for other metals.
Income from mining operations was $5.7-million in 1999, an improvement of
$16.8-million compared with the prior year. The 1999 improvement was due to
stronger metal prices and further productivity improvements and operating
cost reductions.
After other income and expense of $10.7-million, which included interest
expense, amortization of deferred foreign exchange loss, gain on palladium
forward contracts and income taxes, the company recorded a net loss for
1999 of $5.2-million or 84 cents per share compared with a net loss of
$17.5-million or $1.90 per share in 1998.
Cash flow from operations was $12.9-million in 1999 compared with cash used
in operations of $5.1-million in 1998. The improvement in cash flow from
operations was primarily due to higher metal prices and better operating
performances during the year. Changes in non-cash working capital consumed
$28.1-million of cash in the current year, primarily relating to the
payment terms of concentrate inventories awaiting settlement with the
smelter. The company received advances on palladium settlements of
$15.9-million which are due as the concentrate shipments are settled each
month. Advances on palladium settlements have been categorized as a
financing activity. After allowing for non-cash working capital changes,
cash used in operations was $15.1-million in 1999 compared with
$11.5-million in 1998.
Investing activities required $4.3-million of cash in 1999, with the main
capital investment activity being $6.7-million of exploration and
development at the Lac des Iles mine. Offsetting the capital expenditure
was $4.9-million of cash realized on the settlement of palladium forward
contracts. Financing activities raised net proceeds of $18.6-million in the
current year compared with proceeds of $16-million in the prior year. The
net source of financing for investing activities in each of these years was
additional notes payable issued to Kaiser-Francis Oil Company.
Working capital increased to $15.2-million at Dec. 31, 1999, compared with
$8.3-million at Dec. 31, 1998, reflecting the improved operating
performance and higher metal prices. In particular, concentrate inventories
awaiting settlement increased to $30.5-million at Dec. 31, 1999, compared
with $1.3-million at Dec. 31, 1998. The concentrate inventories awaiting
settlement are net of refining and smelting charges, with final settlement
ranging from one to nine months after the year-end.
The company's term note due to Kaiser-Francis Oil Company increased during
the year by the accrual of interest in the amount of $8.8-million and the
issue of an additional $3.5-million in notes, offset by a foreign exchange
adjustment of $5.9-million resulting from a stronger Canadian dollar. At
Dec. 31, 1999, the company has deferred a foreign exchange loss of $787,000
with respect to these term notes which are payable in U.S. dollars.
CONSOLIDATED STATEMENT OF OPERATIONS
Year ended Dec. 31
(in thousands of dollars)
1999 1998
Revenue from
metal sales $ 44,564 $ 28,149
Deduct: smelter
treatment,
refining and
freight costs (5,387) (5,991)
Net revenue
from mining ------ ------
operations 39,177 22,158
Operating expenses
Production
costs including
overheads 24,169 25,536
Amortization 7,898 6,977
Administrative
expenses 1,014 631
Environmental
costs -- Quebec 300 21
Provision for
mine closure costs 118 113
Writedown of
mining interests - -
Total operating ------ ------
expenses 33,499 33,278
Income (loss)
from mining
operations 5,678 (11,120)
Other income (expenses)
Interest income 80 68
Gain on palladium
forward contracts 302 4,567
(Loss) on disposal
of capital assets (3) (53)
Interest (535) (620)
Interest on
long-term debt (9,087) (8,073)
Amortization of
deferred foreign
exchange (loss) (1,498) (1,200)
Foreign exchange
gain (loss) 29 (863)
Total other income
(expenses) (10,712) (6,174)
(Loss) before
income taxes (5,034) (17,294)
Income taxes (116) (235)
Net (loss)
for the year $ (5,150) $(17,529)
Net (loss)
per share $(0.84) $(1.90)
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