NAP dips back into the red

Startup problems at the newly expanded Lac des les mine in northern Ontario, combined with lower realized palladium prices, resulted in a third-quarter loss of $2.7 million for North American Palladium (PDL-T).

Since hitting a record high of US$1,094 per oz. in January, palladium has plummeted to about US$330. The reversal ended an 18-month rally sparked by temporary supply disruptions from Russia, which account for two-thirds of world production.

For NAP, the downturn has depressed its realized prices to the lower end of a range provided under its marketing agreement. The contract, which began in mid-2000, provides a floor price of US$325 on every ounce produced until mid-2005, but caps half at US$550. A small but lucrative hedge book covers portions of 2001-2003 production.

Consequently, the recent 5 per-share loss, which came on revenue of $20.2 million, compares with net earnings of $16.6 million ($1.20 per share) on $27.6 million a year ago. A 30% increase in production offset some of the revenue lost to palladium’s devaluation but not nearly enough to overcome the higher operating costs associated with the expansion.

Cash flow, on the other hand, was a mere $627,000, versus $22.4 million last year.

The 9-month picture looks slightly brighter, with NAP pocketing a profit of $6.3 million (12 per share) on $64.6 million, compared with $37.3 million ($1.42 per share) on $78 million in the corresponding period of 2000. Here, a $5.2-million provision for income taxes was partly to blame for the reduction in earnings.

Again, cash flow was down significantly, at $16.6 million, compared with $54 million.

Lac des les, which completed a six-fold expansion in June, turned out just 36,891 oz. from 910,509 tonnes of ore during the recent quarter, compared with 28,273 oz. from 227,262 tonnes a year earlier.

Cash costs, in turn, rose 11%, year-over-year, to US$306 per oz., which is nearly twice the projected life-of-mine average. Basically, the 30% increase in production was outpaced by a 357% increase in total operating expenses.

NAP has since reactivated the crusher and some flotation cells in the old plant to bring milling and recovery rates in line with expectations. Evenually, new facilities will be installed at a cost of $15 million.

To reduce costs even further, NAP has revised its mining plan for 2002. Only 52,000 tonnes of ore and waste will be mined each day instead of 76,000 tonnes. A stockpile of some 6.4 million tonnes, containing 284,500 oz. palladium, will make up the difference.

In exploration news, NAP has now sunk 20 deep drill holes in a fault-offset extension of the higher-grade core of the Roby zone. The offset, which begins 250 metres to the west, was traced between vertical depths of 560 and 903 metres over a strike length of 300 metres.

Hole 52 returned the best result: 54 metres grading 5.44 grams palladium per tonne, including 10.5 metres at 10.32 grams. Other highlights include 13.3 metres of 11.19 grams in hole 20 and 12.9 metres of 8.69 grams in hole 59.

Mineralization remains open to the south, at depth, and toward the surface beneath the fault. Movement along the fault was obilique-normal, accounting for the surface projection.

Above the fault, the high-grade lens has been extended to 390 metres. The fault cuts the zone at a depth of 390 metres at its southern end and at a depth of 625 metres at its northern end. However, mineralization remains open to the north and down-plunge.

According to NAP, the results warrant the continuation of mining below the planned pit bottom of 400 metres. A structural analysis came back positive, but definition drilling and engineering studies are required before an underground plan can be devised.

Nearby, crews are mapping and sampling various targets at the Buck Lake and North Lac des les properties. The program follows regional work that included an induced-polarization survey. Drilling is expected to begin before year-end.

At Sept. 30, NAP had $96 million in working capital and $142 million in long-term debt. It is also negotiating a US$20-million credit facility with Kaiser-Francis Oil, its largest shareholder.

NAP has 50.4 million shares issued and outstanding. There are also 1.2 million options in various hands, which can be exchanged at $11.34 apiece between Jan. 19, 2002, and mid-2006.

At presstime, NAP was trading at $6.08, well off its 52-week high of $17.50 and $1.40 more than its low over the same period.