NAP’s earnings crushed

A sharp drop in production owing to crusher problems and a tailings leak at the Lac des Iles palladium mine, near Thunder Bay, Ont., pushed North American Palladium (PDL-T, PAL-X) into the red to the tune of $53.6 million in 2005.

$1.03 per share, the loss compares to a year-earlier loss of $1.79 a share, or $92.1 million. The loss in 2004 included a $108-million, non-cash writedown on the carrying value of the company’s mineral interests. Revenue between the two periods was halved to $92.6 million. During the year, operations ate through $39 million, a stark contrast to the $52 million generated in 2004.

Compounding the toll that lower production took on revenues were lower realized prices, and declining head grades and recoveries. On the flip side, waste stripping, energy costs and the loonie were all higher.

During the year, production at the company’s sole mine slipped by 43% from a year earlier to 177,167 oz. The average recovery rate rang in at 69.6%. Recovery rates improved during the later part of eth year (averaging 70.7% in eth fourth quarter) owing to ongoing improvements to the flotation circuit.

On the sales side, NAP averaged US$230 per oz. of palladium, while cash costs (net of byproduct credits) more than doubled to US$359 per oz. Aside from 6,403 oz., sales did not benefit from NAP’s palladium sales contract that featured a floor price of US$325 per oz. The contract expired at the end of June.

“While the latter half of 2005 and early 2006 were more challenging than originally anticipated, management is confident that the operational difficulties at Lac des Iles have since been fully resolved,” the company said in its fourth quarter financial results.

Yearend open-pit proven and probable reserves at Lac des Iles stood at 13.5 million tonnes running 2.13grams palladium, 0.22 gram platinum and 0.16 gram gold, plus 0.07% copper and 0.06% nickel, based on a cutoff grade of 1.1 grams palladium

Underground reserves are classified as probable only, and unchanged from the end of 2004 at 3.5 million tonnes running 6.62 grams palladium, 0.4 gram platinum and 0.3 gram gold, plus 0.07% copper and 0.08% nickel, based on a cutoff grade of 4.5 grams palladium

Underground production from the Main High Grade zone beneath the ultimate pit floor is scheduled to begin later this quarter. Plans call for mining at a rate of and 2,000 tonnes per day, which will be blended with 13,500 tonnes per day from the open pit to yield a an average feed grade of 2.33 grams. The underground operation will run for at least five years.

“Once the underground comes online fully, and palladium production returns to historical levels, the company expects to be well positioned to benefit from the increasing palladium price.”

At the end of 2005, NAP had $15 million in cash and equivalents, with debt of $46.3 million, both off year-ago figure.

With its cash limited, the company plans to offer up to US$58.5 million in convertible notes and warrants to its investor and major shareholder Kaiser Francis Oil, with a 50.4% stake.

The notes and shares will be offered at a premium of 13% to the weighted average trading price for the five consecutive trading days prior to the closing date, anticipated to be Mar. 15.

North American Palladium plans to use the proceeds to complete underground development at Lac des Iles mine, to continue work on Gold Fields (GI-N, GOF-L) Arctic Platinum project (APP) in Finland, where it can pick up a 60% stake by completing a feasibility study by the end of June of 2008. NAP would have to issue US$45 million worth f its shares to maintain its stake on a positive production decision.

At the end of June 2004 resources at APP totalled 168.3 million tonnes containing 1.76 grams palladium, 0.45 gram platinum, 0.12 gram gold plus 0.19% copper and 0.09% nickel.

Shares in North American Palladium were 50, or 4%, better at $12.65 in afternoon trading on the Toronto Stock Exchange following the news on Mar. 3. The shares have traded in a 52-week range of $4.92 to $14.60.