NAP sizes up Lac des les underground (August 25, 2003)

North American Palladium (PDL-T) will launch a full feasibility study of a proposed underground mining operation targeting the Main High Grade zone at its Lac des les palladium-platinum mine, 85 km north of Thunder Bay, Ontario.

The decision follows prefeasibility work that outlined a probable reserve totalling 5 million tonnes grading 5.9 grams palladium, 0.35 grams platinum, 0.29 gram gold per tonne, plus 0.06% copper and 0.07%.

The reserve is contained within a 350-metre long, sub-vertical zone directly below the mine’s existing pit. The 12-metre thick zone has an average grade of 6.1 grams palladium per tonne.

Another 156,000 tonnes running 6.3 grams palladium, 0.38 grams platinum, 0.23 gram gold, 0.05% copper and 0.09% nickel are classified as indicated resources. Inferred resources are set at 7.2 million tonnes averaging 5.5 grams palladium, 0.33 grams platinum, 0.30 gram gold per tonne, plus 0.08% copper and 0.13% nickel

The estimates are based on 47,000 metres of infill drilling during 2002, and employ a cutoff grade of 3.5 grams palladium and a palladium price of US$325 per oz.

NAP’s pre-feasibility study considered a mechanized, 2,000-tonnes-per-day longhole stope mine accessing reserves via a portal in the pit. Cumulative cash flow is projected at $37.4 million at a palladium price of US$325 per oz. Capital costs are put at $37.3 million with operating cost estimated at US$250 per oz.

Over the next six months, the company will continue with a program of mine design, metallurgical testing, market studies, and economic modeling aimed at bringing the study to the feasibility level.

Meanwhile, open-pit reserves at Lac des les have been more than halved after a recalculation based on a long-term palladium price of US$325 per oz.

Under the new regime, proven and probable reserves total 39 million tonnes running 1.9 grams palladium, 0.2 gram platinum 0.15 gram gold per tonne, plus 0.06% copper and 0.08% nickel. The new estimate also employs a cutoff grade of 1.1 grams palladium.

At the end of 2002, NAP reported proven and probable reserves of 88.7 million tonnes grading 1.5 grams palladium, 0.2 gram platinum 0.12 gram gold, 0.06% copper and 0.05% nickel, based on a cutoff grade of 0.7 gram palladium and a long-term palladium price of US$400 per oz.

Additionally, total measured and indicated resources have shrunk to 13.7 million tonnes averaging 1.7 grams palladium, 0.2 gram platinum, 0.14 gram gold, 0.07% copper and 0.08% nickel (versus 65.9 million tonnes running 1.6 grams palladium, 0.2 gram platinum, and 0.1 gram gold at the end of 2002). Inferred resources are estimated at 110,000 tonnes grading 1.5 grams palladium, 0.2 gram platinum, 0.1 gram gold, 0.06% copper and 0.07% nickel.

NAP says its forward sales contracts guarantee a minimum price of US$325 per oz. on each oz. produced through the end of June 2005. The contracts are capped on the upside at US$550 per oz. on 50% of production.

NAP’s chief executive Andr Douchane says the revision of open-pit reserves to the lower end of its price range is in keeping with national policy 43-101, and more accurately reflects the current market price for palladium, which has been sitting below US$200 per oz. since late March. Douchane doesn’t expect palladium prices to improve much until late 2004 or early 2005, when huge inventories start to decline and automakers start looking for more palladium.

During the three months ended June 30, the 15,000-tonne-per-day Lac des les operation produced 59,069 oz. of palladium, compared with 62,168 oz. in the similar period of 2002. Daily mill throughput slipped by 1,267 tonnes to 12,692 tonnes. The average headgrade climbed by 4% to 2.1 grams; palladium recovery rates were little changed at 76.6% (T.N.M. July 21-27/03).

Total cash costs (net of byproduct credits) climbed by US$33 per oz. to US$256 per oz., thanks mostly to a stronger Canadian dollar. An unscheduled 6-day shutdown to repair a motor bearing in the semi-autogenous grinding mill also chipped in to higher unit costs.

NAP’s second-quarter net income totalled $10.4 million (or 20 per fully diluted share) on revenue of $44.6 million, compared with year-earlier net earnings of $7.5 million (or 15 a share) on $41.7 million. The recent quarter included a $2.3-million writedown for the damaged primary crusher, which, after providing all of the quarter’s coarse ore mill feed, was replaced by a new gyratory crusher.

For the first half of 2003, net income came to $18.5 million (37 per share) on revenue of $89.8 million, compared with earnings of $13.8 million (27 per share) on $86.3 million the year before.

Cash from operations climbed by $6.1 million to $20.8 million during the second quarter, and by $17.5 million to $31.2 million in the first six months.

At the end of June, the company had $7.4 million in cash and equivalents, and $80.4 million in long-term debt (down $19.2 million from the beginning of the quarter).