NA Palladium’s efforts at Lac des Iles pay off

When a mine is placed on care and maintenance, operations often never resume. Sometimes the mine has run out of ore, or into technical difficulties, and metal prices cannot justify a restart. Rarely is a suspension considered an opportunity to grow.

But when the Lac des Îles mine near Thunder Bay, Ont., shut down in late 2008 as a result of a sudden and precipitous decline in the palladium price, owner North American Palladium (PDL-T, PAL-X) got busy.

Under the leadership of its new president and CEO Bill Biggar, the company launched an ambitious exploration drive that resulted in the delineation of the Offset zone, a large orebody that remains open in all directions and has the potential to turn Lac des Îles into a long-life, low-cost palladium producer.

“During my tenure at Barrick (as senior vice-president), it was part of our operating philosophy that when we bought a company or a mine, we would do extensive drilling nearby because that gives you your highest probability of finding more ore,” he says.

“We realized we hadn’t really done any drilling on Offset and didn’t know if a ramp system was going to be the most economical way to mine the deposit, so while we were on care and maintenance we thought ‘why don’t we put a big effort into exploration and see if we can delineate this orebody?'”

The results of a recent scoping study on the Offset zone, a fault-displaced continuation of the Roby zone currently being mined, suggest the effort paid off.

Commercial production from Offset is expected to begin in the third quarter of 2012 at a rate of at least 250,000 oz. palladium per year and an 8-year life-of-mine average cash cost of US$132 per oz., compared to 140,000 oz. on an annualized basis at a cash cost of US$325-350 per oz. in 2010. (The mine resumed operation in April.)

The company will spend almost half the total capital expenditures of $204.1 million on developing a shaft from surface to a depth of 1,300 metres, including related surface and service facilities.

Most of the remaining cash will be allocated to waste development (including the ramp), mining equipment, project management and definition drilling.

“We realized that the Roby zone only had about two more years of life, and we really needed to better understand the nature of the Offset orebody,” says Biggar.

“As we drilled and found more ore, it became clear that we could certainly justify the capital cost of putting in a shaft.”

To pay for the development project, North American recently raised $94.2 million through an equity offering to boost the company’s cash reserves to $150 million. If all the warrants attached to financing are exercised next year at a price of $6.50, another $40 million will be added to the coffers. The company also has a $30-million operating line of credit with the Bank of Nova Scotia, but no long-term debt.

Assuming a palladium price of US$450 per oz., the project is expected to generate a 16.7% pretax internal rate of return and have a payback period of 48 months.

One advantage the Offset development has over greenfield projects of a similar scale is that the execution risk is much lower because of the infrastructure, full permitting, and experienced operating team that comes with 17 years of mining and milling at Lac des Îles.

North American may also be able to take advantage of a rising palladium price. When the company put the mine on care and maintenance in October 2008, palladium was trading at a monthly average of US$190 per oz.

The price has since recovered to more than US$500 per oz. and is expected to move higher as demand outpaces supply from the two main palladium-producing nations, South Africa and Russia.

New York-based CPM Group’s long-term outlook for platinum group metals forecasts an average palladium price of US$588 per oz. over the next eight years.

The two main price drivers are investment demand as new palladium ETFs (exchange traded funds) hit the market and car sales (palladium is used extensively in gasoline engine catalysts) rise as the world economy recovers from a global slump.

Meanwhile, shortfalls of resources such as electricity, skilled labour and water are expected to reduce output from South Africa, home to 41% of the world’s mine supply.

North American Palladium is in the midst of extending the ramp that serves the Roby zone down to Offset to provide a platform for both exploration and raiseboring a shaft from the 4815 level to surface.

The ramp development is expected to be complete by the end of the year, while exploration and raiseboring will begin in November. Subsequently, the company will sink the remainder of the shaft to the bottom of the mine at the 4180 level.

“The key driving variable, the value of the commodity you’re producing, is out of your control,” says Biggar.

“So all you can do is make sure you have a long-life orebody and are a low-cost producer. I think we’re going to achieve that when we get the Offset zone developed.”

The mine’s exploration potential is encouraging. Another two zones, Cowboy and Outlaw, were discovered near Offset in 2009, while this year’s drilling has extended the upper portion of Offset, which remains open in all directions.

“On the Cowboy and Outlaw zones, we pushed the drills as far as we could and we ended up in mineralization,” says Biggar. “We’ll get back at those zones when the development gets deeper later this year.”

If the new zones and the unexplored areas of Offset were to add another two years to the mine’s life at similar grades, the internal rate of return would jump to 19.4% and the net present value to $225 million at a 5% discount rate.

North American plans to spend $15 million on exploration this year, compared to $9 million in 2009, using a 20-person exploration team working out of Thunder Bay. The drilling and exploration program is expected to identify additional resources, upgrade resource classifications, and facilitate the planning of future mine development.

– The author is a freelance writer specializing in mining issues, and principal of Toronto-based GeoPen Communication, www.geopen.com