Plunging PGM prices force Lac des les shutdown

A dramatic drop in platinum and palladium prices has forced North American Palladium (PDL-T, PAL-x) to temporarily shut down its Lac des les mine, near Thunder Bay, Ont., which has been operating below the breakeven point.

The poor short-term outlook for the automotive sector, which uses platinum and palladium for catalytic converters, left the company with no choice but to close the mine until the situation improves, said NAP president and CEO, Bill Biggar.

“The outlook for automotive over the near term is, quite frankly, not promising,” Biggar said during a conference call. “It’s also clear that the price of palladium will hold at current low levels in the near term or possibly face further downward pressure.”

Since June, palladium has fallen to US$180 per oz. from US$475 per oz., while platinum has plunged to US$880 per oz. from US$2,100.

Morningstar analyst Annie Sorich says she wasn’t surprised to hear about the shutdown.

“We know the mine was economical with palladium above US$300 per ounce,” Sorich explains. “And I’d already moved my (risk) rating of the company to ‘extreme’ because their production profile is just too uncertain.”

An Oct. 3 report by Sorich pointed out that NAP’s success, “hinges on the success of its exploration efforts.”

That’s because NAP expects to deplete ore reserves from the Lac des les open pit, which makes up the bulk of production, during the first half of 2009. The underground mine has only enough ore to last until late 2010.

Merrill Lynch analyst Michael Jalonen has downgraded NAP’s rating to “underperform,” citing its below-industry reserve life. The stock was given a target price of $1.75.

NAP shares fell 20% on news of the closure, or 36, to $1.44. The company has a 52-week high of $9.44, reached last February when platinum and palladium prices were near their peak, and a low of $1.31 on Oct. 10.

Once the mine closes on Oct. 29, NAP plans to focus its energy on expanding reserves and doing grass-roots exploration at Lac des les. It will also look for potential acquisitions and joint-venture opportunities to bolster its portfolio.

“In this current environment we expect there will be many attractive options for us to consider,” Biggar said.

Although Biggar said the company was still crunching numbers to determine its burn rate during the shutdown, the company’s cash position is strong. It has $65 million in its coffers, little debt, and is expecting further payments from recent production.

The company originally expected to produce 300,000 oz. of palladium this year; it produced nearly 127,000 oz. over the first six months of the year at an average cash cost of US$120 per oz. and earned $23 million.

NAP plans to test the viability of a southern extension of the Lac des les pit and will also carry out a feasibility study on the Offset high-grade zone in the underground mine. The Offset zone has been traced to a depth of 1,300 metres and along strike for 600 metres. A Micon International scoping study released in Mayestimated that the Offset zone could extend operations until 2018, yielding 250,000 oz. palladium, per year, plus platinum, gold, nickel and copper.

The company has had some setbacks as well. In July, NAP said its Arctic platinum joint venture with Gold Fields (GFI-N, GOF-j) in Finland wasn’t economic and that there would be no feasibility study released at the end of August as planned.

Biggar said the company will also stop exploration at its Shebandowan West project, 90 km west of Thunder Bay, Ont., for the time being.

NAP has earned a 50% interest in Shebandowan from Vale (RIO-n) by spending $3 million exploring what is thought to be the west extension of the past-producing Shobandowan mine. The mine was in operation from 1972-98, producing 8.7 million tonnes grading 2.1% nickel, 1% copper and 3 grams platinum group metals and gold.

Biggar is positive about the long-term outlook for Lac des les, in production since 1993 and producer of 4% of the world’s palladium. NAP will lay off about 350 people, keeping only a skeleton staff for care and maintenance of the operation.

“We are very much aware of its potential impact in the months ahead on the lives of our employees,” Biggar said. “There was simply no other way to do the right thing for them and for our shareholders than to take this defensive but temporary action to preserve the company’s strong assets and financial base.”