North American Palladium doubles down underground at Lac des Îles

The story of North American Palladium (TSX: PDL; US-OTC: PALDF) is perhaps best told in threes.

In 2003, North American Palladium had just over 3 million oz. palladium equivalent in reserves at its flagship Lac des Îles palladium-platinum-gold-copper-nickel mine in northwestern Ontario. Over the next 15 years the company mined slightly less than 3 million oz. palladium equivalent. Now, a new feasibility study pegs the mine’s reserves at over 3 million oz. palladium equivalent.

What was old is indeed new again.

The 2018 feasibility study builds on a 2017 feasibility study that called for the pushback of the now-dormant Roby pit.

The pit pushback, once considered critical, has been replaced in the new study with an expansion of the underground mine in the Offset zone using sub-level shrinkage — or underground bulk mining — to wring value from several near-surface resources outside of the original mine plan.

“There is a lot of material deeper than we were going to get to with the pit, and a lot of other material that was being cut off by the economic pit shell laterally from the pit,” says James Gallagher, president and CEO of North American Palladium, in a telephone interview. “So we’ve thrown all of that in the basket with an underground mining approach that is very low cost … [in the new study] we’ve added ounces and improved the cash flow.”

The new study extends the mine life by one year to 2027 — with average underground production reaching more than 12,000 tonnes per day, up from 6,000 — and outlines 40.87 million proven and probable tonnes (underground and surface) grading 2.31 grams palladium per tonne for 2.32 million oz. pure palladium, or 3.08 million oz. palladium-equivalent.

The after-tax cash flows tally to between $52 million and $144 million annually, for a total of $909 million over the mine life. The study pegs the after-tax net present value of Lac des Îles at $637 million, using an 8% discount rate.

North American Palladium says palladium would be produced at US$622 per oz. palladium all-in sustaining costs and US$504 per oz. palladium cash costs, with an average $33.67-per-tonne underground mining cost.

The operational turnaround is well on its way, with North American Palladium having posted five straight profitable quarters.

The on-site, 15,000-tonne-per-day mill is already processing 12,000 tonnes per day, of which sub-level shrinkage accounts for 6,400 tonnes. The rest comes from low-grade tailings and stockpiles.

The previous blast-hole mining method at depth proved unreliable to drive adequate tonnage.

“We’ve got our production rate up, which has helped to drive our unit costs down,” Gallagher says. “We’ve changed mining methods … we have re-engineered the mine to take full advantage of a very large, and in some cases low-grade, resource, but because our operating costs are down, we’re able to mine that at a profit now.”

North American Palladium’s 2018 guidance is 230,000 to 240,000 oz. palladium, plus by-product credits. Gallagher points out that the company is on pace to reach its target, adding that operational changes have put the company on a “clear path to sustainable growth.”

The company spent $12 million on exploration in 2018, and will likely spend even more next year. An underground exploration drift is in the works so that the company can properly drill off its resources at depth, but the 2019 budget has yet to be approved by the board.

“We probably have more underground and surface targets today than ever in the company’s history,” Gallagher says.

A promising target includes the Pantleg structure, which comprises two mineralized trends in the southern part of the Offset zone.

“We are trying to put our arms around what that actually looks like … there is some very interesting high-grade material there,” he adds.

One hole drilled earlier this year in the Offset South zone intersected 149 metres averaging 1.8 grams palladium per tonne, including 17 metres averaging 2.9 grams.

North American Palladium is already mining ore from 13 underground draw points, with much of it coming from the upper part of the old mine, which started production in 2006.

Some of the ore was left behind because it was considered too low grade, but with the palladium spot price at US$1,100 per oz. (or more than C$1,400) in October, the stockpiles are once again profitable.

Operating costs in the last quarter came in at just above $38 per tonne, which would make Lac des Îles one of the lowest-cost, underground precious metals mines in Canada. Gallagher says the net smelter return for North American Palladium is between $110 and $120 per tonne.

Gold and platinum by-product credits each make up 10% of North American Palladium revenues, with copper and nickel credits adding a few percent.

Half of Lac des Îles’ concentrate is processed at Glencore’s (LON: GLEN) Sudbury smelter, while the rest makes its way to the major’s Horne smelter in Rouyn-Noranda, Quebec.

Until two years ago, North American Palladium was sending its concentrate to the Vale (NYSE: VALE) smelter in Sudbury. But when that contract was up, the company looked at other options, and found a willing partner in Glencore.

“Glencore is very interested in keeping its smelters full, and we got much better terms. And that’s part of our turnaround story, as well. We gained a couple of points,” Gallagher explains.

Gallagher, a long-time Falconbridge executive, joined a struggling North American Palladium as chief operating officer in late 2013, after a stint as global mining director with engineering firm Hatch.

After years of bleeding cash, Lac des Îles needed a new plan and a cash infusion to make it work.

Toronto-based Brookfield Asset Management (TSX: BAM.A; NYSE: BAM) gave the distressed miner a $130-million loan in 2013. But just two years later, when North American Palladium couldn’t meet its debt obligations, Brookfield’s loan was converted into a 92% ownership stake, leaving only an 8% float available to the market.

At the time of the conversion, the share price was $6. Now it’s approaching $10, and Brookfield is looking to sell its entire stake, or at least part of it.

“Our company is up for sale. That’s public knowledge,” Gallagher says.

Since 2012 palladium prices have risen 2.5% annually, and the trend shows no signs of abating.

About 80% of palladium is used in catalytic converters in gas-powered vehicles. It has been the best performer among precious metals over the previous two years, mostly owing to a supply deficit created largely by stronger automobile demand in China and consumers turning away from diesel-powered cars, which mostly use platinum in their catalytic converters.

Gallagher notes that catalytic converters in hybrid vehicles require more palladium than standard gasoline engines because hybrid engines don’t get as hot, which means the converters need more palladium to do the same job.

“Palladium consumption is higher than production, and most of the ETFs have traded off their palladium stocks,” Gallagher says.

Lac des Îles is one of two primary palladium mines in the world. The other is Stillwater in south-central Montana, which South Africa’s Sibanye Gold (NYSE: SBGL) bought in late 2016.

Russian miner Norilsk Nickel produces 40% of the world’s palladium as a by-product of nickel mining. Another 48% comes from the aging and high-cost platinum group metal mines in South Africa’s prolific Bushveld Igneous Complex.

Any potential sale of North American Palladium could be hindered by an ongoing dispute with the Kiashke Zaaging Anishinaabek, also known as the Gull Bay First Nation.

North American Palladium signed a memorandum of understanding with Gull Bay Chief Wilfred King in June after a blockade at Lac des Îles in May. The First Nation is unsatisfied with the mine’s impact on the local watershed.

The initial agreement will be further defined, but has yet to be negotiated. North American Palladium does not have an Impact and Benefits Agreement with the Gull Bay First Nation.

North American Palladium shares trade in a 52-week range of $6.14 to $9.70. It has 58.1 million shares outstanding for a $554-million market capitalization.

— Based in Toronto, Brian Sylvester is a freelance business writer specializing in mining.