Canaccord sees possible double in N. A. Palladium

New reserves and a production expansion at the Lac des les mine in northwestern Ontario promise to bring the small platinum group metals producer North American Palladium (PDL-T) into prominence following some difficult years. Analysts Brian Christie and Johann Aler of Canaccord Capital recommend the company as a “buy” with a target share price of $17.

North American Palladium, which recently announced a US$90-million project term loan that will finance the expansion of the Lac des les mine, currently trades in the $8-9 range on the Toronto Stock Exchange. Strength in the palladium-platinum market, as well as factors unique to the company, have seen the price rise from a low of 99 in April 1999; on the way it touched $12.50.

Prices of platinum group metals, especially palldium and rhodium, have been unusually strong of late as doubts arose over the regularity of Russian exports. The Noril’sk complex in northern Russia is the largest individual palladium producer in the world, and fears that export levels would be cut are not new; but this time, political wrangling over export decrees (which were tied to other political issues in the country) pushed the palladium market to all-time high prices of around US$700 per oz.

Two side-beneficiaries have been North American Palladium and Montana-based Stillwater Mining (SWC-X); the latter rose to the US$40 range from US$25 a year ago. These North American producers owe their rise to the market but also to advantageously timed corporate moves — both companies got out from under a series of disastrous hedge contracts.

A major exploration program at Lac des les has now turned North American into a potentially large palladium producer. A drilling campaign on the Lac des les gabbro complex, the host rock of North American’s ore deposit, blocked out a reserve of 74.2 million tonnes grading 1.64 grams palladium, 0.18 gram platinum and 0.14 gram gold per tonne, with 0.07% copper and 0.06% nickel. Feasibility studies on the reserve concluded that a 15,000-tonne-per-day open-pit operation feeding an expanded mill would be economic. Average annual production would run to 300,000 oz. of platinum group metals, mainly palladium.

The feasibility study forecast the new operation’s cash production cost at US$131 per oz. The capital cost of bringing the new pit and mill on-stream, estimated at US$126.5 million, is being financed by the US$90-million term loan North American has concluded with three major banks.

The remaining variable is metal prices. Christie and Aler point to commodity research by their London-based colleague, Rhona O’Connell, in which she concludes that the present high price levels (US$521 per oz. for platinum and US$590 for palladium) are distorted but sees prices in the US$400-to-$500 range as sustainable.

Demand over the next two years is expected to outrun supply significantly, even with Russian exports returning to normal, and Christie and Aler believe they have used conservative forecasts for the palladium price: US$500 per oz. through 2000, US$420 from 2001 to 2003, and US$350 thereafter.

Though North American Palladium has lost money for three years running, Christie and Aler expect to see significant improvements in the company’s earnings statement for 1999. Assuming an average price of US$350 for both palladium and platinum from 2004 onwards, the analysts predict earnings of 44 per share in 2000, 78 in 2001, $2.58 in 2002, $1.56 in 2003, and 41 to 82 in succeeding years to 2009.

To estimate a target value for North American Palladium shares, Christie and Aler used a multiple of 1.75 of the net asset value per share; for an NAV of $9.89 per share, estimated for 2002, the multiple gives a price of $14.20. Using a multiple of nine to 10 times the life-of-mine cash flow per share, Christie and Aler get a target price of $19.12 based on estimates of cash flow in 2001 and 2002.