North American Palladium
(NYSE AMEX: PAL) (TSX:PDL)
William Biggar, President & CEO
About North American Palladium
NAP is a Canadian precious metals company focused on the production of palladium and gold in mining friendly jurisdictions. Lac des Iles, the Company’s flagship mine, is one of North America’s two primary palladium producers. Located approximately 85 kilometres northwest of Thunder Bay, Ontario, Lac des Iles has produced palladium since 1993. NAP also owns and operates the Sleeping Giant mine located in the prolific Abitibi region of Quebec. The Company has extensive landholdings adjacent to both the Lac des Iles and Sleeping Giant mines, and is pursuing an aggressive exploration program aimed at increasing its reserves and resources in those areas. NAP trades on the NYSE Amex under the symbol PAL and on the TSX under the symbol PDL.
WSR: Talk about some of your positive drill results from Offset and Cowboy.
Bill Biggar: We just announced, earlier this week, the results of our fourth quarter 2009 drilling. We had a focus, actually throughout all of 2009, on expanding our underground resources in what we call our Offset Zone. We actually drilled about 42,000 meters into that zone during 2009. We’re quite pleased that we are seeing a good increase in the grades, we’ve found some new zones, and this Offset Zone is open geologically in all directions. I should step back and say that North American Palladium has been operating since 1993, so we’re a seasoned operator and that was really the culture of the company, but we didn’t historically do a lot of exploration. So, we actually had our mine on care and maintenance, went down in late 2008 with the global downturn and the dramatic drop in the price of palladium, which has since more than recovered beyond the levels at that point. But during that time, we had a big push on exploration, and it’s allowing us really to define our future here in terms of the size of the resource that we’ve gotten. And really, what’s become clear is we have a world-class palladium mine at Lac des Iles, and by world-class I mean more than 5 million ounces of palladium, long-life reserves. And, we expect to be a very low cost producer of palladium as we get into actually extracting the ore from this Offset Zone where we are now drilling.
In terms of a formal update on the results of our drilling, that will be available sometime early in the second quarter. We do an annual update on our reserves and resources, so that will be coming along shortly. And then, the other thing we’ve been working on is how we are going to develop this Offset Zone. We have about two and a half years of mining in our current undergrounds; we call it the Roby Zone. And then, we will seamlessly move into this Offset Zone to continue production. So, we’re working through a plan for how we are going to mine from this Offset Zone and what’s become clear because we have — if the zone is going to be large enough, we are actually going to put in a shaft to extract the ore. Currently, our underground operations, we have a ramp system, we run 60-ton trucks up and down a ramp; that’s fairly expensive mining. By putting in a shaft, we expect to cut our costs in about half, and that will make us a very (inaudible) producer of palladium going forward. So, that’s what’s happening up in Lac des Iles.
In terms of our Gold Division, we have our Sleeping Giant gold mine in the Abitibi region of Quebec, and that’s just gone into commercial production; we just declared that at the beginning of this month — beginning of January, and we expect to produce about 50,000 ounces per year there. Our cash costs run about — it depends on the exchange rate between the Canadian and US dollars — but about $525 an ounce; and of course with gold up around $1,100, that gives us a very good margin. We’ve got a large land position around our Sleeping Giant mine. So, we’ll have a fairly significant exploration program in 2010 at our Gold Division as well. What we’re seeking to do there is we have an under-utilized mill at Sleeping Giant, so we’re looking to fill that capacity either from our own properties or we’re also looking at some smaller acquisitions in the area. So in general, in 2010, we will continue to have quite a focus on exploration. As well, we’re going back in full operation at our palladium mine; we announced late last year the restart of that mine. Everything is on track and we expect to be producing palladium again early in the second quarter, sometime in April.
WSR: In terms of some of those palladium trends, talk about those and how well positioned the company is to capitalize on them?
Bill Biggar: We feel we’re really at a good point in the palladium cycle here. As I mentioned already, palladium dropped dramatically from about $425 an ounce down to $200 in late 2008, and really that was a reflection of the dramatic drop in global vehicle production. If we look at the uses of palladium, about 50% goes into catalytic converters or mufflers on vehicles, and we all know there was a pretty dramatic drop on vehicle production. But, we are now in full recovery mode, not only in the mature economies such as the US and in Europe, but importantly the emerging economies. I think most people are aware that China is now the largest vehicle manufacturer in the world; we’ve got Brazil in a similar situation. And so, those who forecast global vehicle production are very bullish for substantial increases over the next few years. It really makes sense because in places like China and Brazil and India, you have emerging affluence, you have a very low penetration of vehicles per capita, and we have low interest rates, which makes the affordability factor quite high. So, we fully expect to see a significant increase in global vehicle production and that will be very positive for palladium. The other factor in palladium’s favor is historically in the diesel engines, which are primarily in Europe, they’ve used almost entirely platinum in their catalytic converters, because of the fuel; you had a very high sulfur content in the fuel. But, we now have low sulfur diesel fuel and that’s allowing the technologies to substitute much more palladium in for the platinum, and so that will be a positive for palladium as well. So, we see a rising demand in front of us.
The other factor I should mention is the Exchange Traded Funds or ETFs as they are called. ETFs started on palladium, and palladium is one of the four precious metals; you’ve got gold, silver, platinum and palladium. The early ETFs were started in 2007 in London and Zurich. Tokyo just added an ETF, started trading in August of last year, and the New York Stock Exchange has just started trading a palladium ETF about three weeks ago; already there’s 400,000 ounces in that ETF. We know how positive the ETFs were for the gold price, and we think we may see a similar effect on the palladium price. So, a very good point in terms of rising demand for palladium.
If we look at the supply side, what a lot of people don’t realize is what a rare precious metal palladium is; there’s only 6 million ounces produced globally per year. To put that in context, we’ve got about 90 million ounces of gold produced per year. And then, you have to look at where does that 6 million ounces come from. About half of it comes from Russia and that’s where Norilsk Nickel, the world’s biggest nickel producer, when they produce nickel they get palladium. But, their palladium grades have been declining over the past few years, so their palladium production has actually been declining. So, that’s 50%. About 40% is out of South Africa, where we have a number of issues there; political issues, we’ve got infrastructure issues around availability of electricity and cost of electricity. Their mines are very deep and going deeper and getting much more costly, and there’s no new mines on the horizon there — palladium mines. And then, if you look at the balance, the remaining 10%, there’s only two primary producers of palladium in North America, and that’s ourselves and Stillwater. So on the supply side, the pressure, if anything, is downward. And that’s a good combination, when you’ve got basically stagnant supply meeting rising demand, and that’s why we are very bullish for the future price of palladium; most forecasters now have a fairly significant increase coming in. I should point given the historical context, two years ago, palladium was $582 an ounce in the first quarter of 2008, and today we are about $425 an ounce. But, there’s every expectation we’ll get back to that $600 range sometime in the next 12 to 18 months, if not higher. JP Morgan was just out the other day with a $700 price target in 2011. So, we are bullish on palladium. And we think from an investor’s point of view, with our world-class palladium mine, we offer them significant leverage to this rising palladium price.
WSR: What are some of the other factors that make the company, North American Palladium, unique from some of the other players in the sector?
Bill Biggar: I think first and foremost, we operate in a mining-friendly jurisdiction. If you want to play palladium and you want to do so without having exposure to currency risk and political risk, there’s really very limited choice. You can invest in the South African miners, but with it goes those risks. We are in Ontario. Canada has got a great history and legacy of innovation and excellence in mining, and so we’re very well situated in terms of where we produce the palladium. I think the other thing is not only does an investor have exposure to rising palladium price, but we’ve also got our new Gold Division. As I mentioned, we are now in production with our Sleeping Giant gold mine. That’s in the Abitibi region of Quebec, which is one of the — was actually just rated the top gold region in the world recently. There’s been 25 million to 30 million ounces extracted from that region over the past 20, 25 years. So, we’re in a good location there as well and we do intend to grow our Gold Division. So really, investors are getting exposure to two out of the four precious metals in one vehicle without political and currency risk.
WSR: Perhaps you can walk us through your background and experience, and that of some of the key management team at PAL?
Bill Biggar: I am the first CEO of the company, and I’ve been CEO now for about a year and half, who is not a miner. I’ve spent time in the mining industry, but my background is more business oriented. But that said, I did work with Peter Munk, who is the Founder of Barrick Gold for six years and three of those years, I was in charge of global acquisitions at Barrick Gold. I’ve also been CEO of one of the Magna companies, that’s one of the world’s largest auto part companies, headquartered here in Canada. And I’ve spent time in the private equity business, but what I enjoy doing is building businesses. And when I was hired in here at North American Palladium, my mandate was to grow this business and to diversify away from dependence on a single mine operation. And we’ve achieved that with our foray into gold and our Sleeping Giant gold mine, and we will continue to look to grow that sector.
In terms of the other management, we really have an entirely new management team over the past 18 months. We have a new CFO, Jeff Swinoga, who has come from — he was at Barrick and then he was CFO at a Canadian base metal company called HudBay. Our Head of Corporate Development also spent time at Barrick. On the mining side, we have a new General Manager at our palladium mine at Lac des Iles; very seasoned individual who has mined all over the world, so we’re pleased to have him on board. So basically, we’ve been mining since ’93. On the operating side, we’ve got seasoned and very good miners, and we have some new senior management now.
WSR: What are some of the goals and objectives that the new team hopes to accomplish over the course of the next 12 months?
Bill Biggar: Our key focus in the next 12 to 24 months is on our palladium operation, our palladium mine, and developing this Offset Zone, which is really the future of that mine up at Thunder Bay. So we will be — as I said, we’re mining underground at the moment in the Roby Zone. We will be doing that for two, two and a half years, but we want to move when we finish that right into this Offset Zone. That should more than double our production levels at a much lower cash cost per ounce. So, that’s really where we think we can create the most significant value for our shareholders. At the same time, we will look selectively to grow our Gold Division. The prices of a lot of the junior gold companies are high at the moment, so I think we will be cautious. We may look at some smaller bolt-on acquisitions in the Gold Division. But, really the next 12 to 18 months, the key focus will be on our palladium mine.
WSR: In terms of investors and the investment community now, you recently renewed your self-perspectives. Do you think that right now investors and the community understand the company’s story and general direction and message of North American Palladium?
Bill Biggar: I think they’re starting to. As I said, my predecessor was a miner and there was limited time spent telling the story out with investors and with the Street. We’ve been evolving that over the past 12 months. We have research coverage now from four or five investment banks. I know people are now starting to follow the story, and we expect that will continue to be more so.
We did an equity offering late last year and closed in October, and that’s brought in a number of institutional investors, many of the Canadian institutions as well as US who are mining-focused. Historically, we’ve had a very large retail component in our stock; we continue to do so. So, I think that getting in some of the institutions now will be positive as well. We’re more viewed as an emerging story at the moment, and you get the benefit of having a seasoned operator and established mine with the exploration upside and development upside that we offer on our Offset Zone, and the key is it’s all built up there. We have a half a billion dollars invested in the mill and the mine infrastructure. So, we can move exploration success very quickly into production because everything’s permitted and everything’s there.
WSR: Before we conclude, just a rehash, why do you believe that North American Palladium — why does the company represent a good long-term investment opportunity to potential investors?
Bill Biggar: First and foremost, we have a world-class palladium mine that offers significant leverage to investors to the rising palladium price. And we are finding more palladium at that mine, and we believe we’ve got a long-term future there as a very low cost producer of palladium.