North American Palladium tables ‘low-cost, low-risk’ expansion plan for LDI

VANCOUVER — North American Palladium (TSX: PDL; NYSE-MKT: PAL) is planning to take its Lac des Îles (LDI) platinum group metals (PGM) mine back to its roots with a recent preliminary economic assessment (PEA) that would see the long-standing operation run through at least 2029. The study includes a return to open-pit mining at the property via a US$59-million mine expansion made possible by a strong palladium market and recent exploration success.

The company has operated the LDI complex — 90 km northwest of Thunder Bay, Ont. — for over two decades, but has been running on an intermittent mill schedule, including 14-day campaigns at 13,000 tonnes per day, followed by 14 days off. The facility is designed to hum along at 15,000 tonnes per day.

N.A. Palladium’s new plan would see LDI return to full-time operation thanks to a hybrid open-pit underground strategy that takes advantage of improved metal prices to capitalize on lower-grade, near-surface material outlined during recent drilling.

The PEA features a resource estimate released in late February, showing a 101% jump in near-surface reserves to 6.3 million tonnes grading 1 gram palladium per tonne for 413,000 contained oz. Near-surface measured and indicated resources  otal 35.6 million tonnes averaging 1.28 grams palladium.

Current underground operations are expected to contribute 23 million tonnes grading 2.1 grams palladium, while the proposed open-pit component will chip in 39 million tonnes grading 1.3 grams palladium. The expansion will also use underground material in LDI’s footwall zones.

“Over the past 20 months we’ve often spoke of the potential of the LDI mining complex,” president and CEO Philip du Toit said during a conference call. “And that’s not only at depth, but near to surface and other attractive areas in and around the so-called footwall zones. For us it’s about the right resources and the right people being overlaid with a long-term vision and execution plan.”

The open-pit should see LDI crank out in excess of 200,000 oz. of payable palladium annually during peak years from 2017 to 2021, with total life-of-mine recovered palladium estimated at 2.3 million payable oz.

The plan would result in after-tax cash flows of $770 million, with a $593-million after-tax net present value (NPV) at a 5% discount rate and a 30% after-tax internal rate of return (IRR). N.A. Palladium reports that, given base-case economic assumptions, there would  be no negative cash flow throughout the mine life.

“We proved during that last quarter of 2015 that running the mill on a full-time basis delivers significant economies of scale, and has driven our unit operating costs lower. Of course metal prices on the foreign exchange have moved dramatically over the past while, and that’s represented in long-term analyst pricing,” COO Jim Gallagher said.

“It makes some of the lower-grade material we have economic. We’re taking advantage of these opportunities in our new plan,” he continued, adding that the study also gives N.A. Palladium optionality to sequence mine feed from the underground and open pit, which could assure strong head grades.

The company is also considering deepening the shaft in its second phase to access the 10.9 million tonnes of 3.3-gram palladium mineralized material below the 1,065 level.

Project capital for phase two is an estimated $242.2 million, generating a 7% after-tax IRR and $22-million NPV at a 5% discount rate.

“The exploration program for the [second phase] is only partly complete, and we already have a potential project with a positive rate of return,” Gallagher said. “Drilling will be ongoing, and we’ll look to optimize the engineering to ensure we establish the best way forward when the resource is better defined.”

Last year, N.A. Palladium produced 174,200 payable oz. palladium at by-product cash costs of US$513 per oz. Annual revenue was $220.1 million compared to $153.2 million in 2013. The 44% year-over-year increase owed in large part to higher palladium production and sales, rising palladium prices and favourable exchange rates.

Payable palladium production for 2015 is expected to jump by 12% to between 185,000 and 205,000 oz., with cash costs ranging from US$440 to US$466 per oz. N.A. Palladium reported cash and equivalents of $4.1 million to end 2014, as well as US$7.1 million in undrawn credit. The company predicts that this year’s cash flow could fund capital expenditures and exploration programs.

“It’s really a very low-risk project, which isn’t the case with other assets in the PGM space. We’re in the right jurisdiction, we have existing infrastructure and operating history, we have a permitted tailings facility, and we have established, positive relationships with our First Nation communities,” Gallagher says. “We’re also in palladium, and it’s really the right metal at this time, with positive market outlooks and serious supply constraints.”

N.A. Palladium has traded within a 52-week window of 14¢ to 67¢, and jumped 128% in the first two months of 2015 en route to a 30¢-per-share close at press time. The company has 392 million shares outstanding for a $113.4-million market capitalization.