North American Palladium loses CFO and suffers downgrade

North American Palladium (PDL-T, PAL-N) is losing its second key executive in the last three months, and CIBC World Markets is taking that as an ominous sign.

CIBC’s research team in London, composed of Leon Esterhuze, Arnold Van Graan, and Ben McEwen, lowered their price target for the company to $1.70 from $2.40 per share.

The downgrade comes after North American announced that its CFO, Jeffrey Swinoga, resigned — a departure that comes just a few months after Bill Biggar vacated his position as CEO. Andre Douchane has been serving as interim CEO since Biggar left.

“Another change in management suggests to us that the risk of an operational disappointment at the company is mounting,” the CIBC report reads. “As a result, we have adjusted our model to account for this, forecasting lower production and higher costs in forthcoming years.”

CIBC still likes the company’s long-term potential since it is uniquely positioned to take advantage of stronger palladium prices going forward by expanding production and driving down costs at its Lac Des Iles mine north of Thunder Bay.

“However, while operational and management opaqueness continues to cloud the outlook, the stock is likely to maintain its loss of correlation with an improved spot palladium price,” the report reads.

North American Palladium says its search for a new CEO is in the advanced stages, but the process has taken too long for the CIBC team. It expected the company’s current COO, Greg Struble, to quickly step in.

“That Mr. Struble has not been appointed CEO suggests that there may yet be further bad news from an operational perspective at either Lac Des Iles or the company’s gold assets in Quebec,” the report states.

Another troubling sign in the CIBC report was that a recent exploration update didn’t give any information on assays. This, CIBC opined, indicates that the program has yet to find anything of significance.

The good news for the research team has to do with palladium spot prices, which it remains bullish on due to a forecasted tightness in the metal market and better U.S. and emerging market automotive sales. The automotive industry accounts for 67% of the metals demand.

But until North American Palladium fills its management positions, cements production plans for the coming years and bolsters its financial position, CIBC expects its share price correlation to the spot palladium price to remain low.

Since the beginning of July, the price of palladium has risen 20% to US$695 per oz., while North American Palladium’s share price has fallen 37% to $1.28.

By comparison Stillwater Mining (SWC-SO), the only other palladium miner in North America, saw its share price climb 40% over that same period to $11.97.

Traditionally, the majority of palladium supply has come out of Russia and South Africa but Russian stockpiles, which have served as an overhand on the market, are widely believed to be at or near their end.

“PDL remains the only PGM company with the ability to achieve higher output at lower cost at some point in the future. It also has the ability to offer real leveraged exposure to rising metals price,” CIBC writes.

North American Palladium’s Lac Des Iles (LDI) mine is one of only two primary palladium producing mines in the world.

The mine is currently undergoing a major expansion to increase production and reduce cash costs. As of the end of September, the company had spent $93 million of the $116 million in capex it expected to spend for the year.

The company plans to ramp up underground mining to 5,500 tonne per day by 2015 and produce roughly 250,000 oz. of palladium per year at cash costs in the US$200 per oz. range.