North American Palladium (NYSEMKT:PAL)
Denver Gold Forum Conference
September 23, 2014 7 a.m. ET
Dave Langille - CFO
Great. For our final presentation the afternoon, we'll shift gears slightly and enter the PGM space.
The last company to present will be North American Palladium. A company that is an established producer in North America, which does helps shield it somewhat from other challenges we see in the PGM industry.
It's my pleasure to introduce Dave Langille to present today. Thank you.
Thank you, and good afternoon, ladies and gentlemen. It's a pleasure to be here at the Denver Gold Forum to speak with you about North American Palladium and how our mine expansion is well positioned to take advantage of rising palladium prices.
For those of you who are new to the company, North American Palladium was one of only two primary palladium producers in the world. We've been in production for almost 20 years, and we're currently completing a mine expansion, which we expect will help us achieve our goal of increasing palladium production and reducing our cash cost per ounce.
I should expect some of my remarks today will contain forward-looking statements so please review the cautionary statements at your leisure.
To briefly summarize North American Palladium's investment case, we have a clear growth strategy to improve our operating margins and drive improved financial performance. I'll discuss this in more detail later, but starting next year, we expect to increase production at much lower cash cost per ounce.
We offer leverage to rising palladium prices. Simply put; palladium is in high demand and we are one of only two primary palladium producers in the world.
By contrast to our peers in South Africa and Russia, we operate in Northern Ontario in Canada, a very attractive and stable PGM jurisdiction.
Moreover, we have a lot of development and exploration upside on our property, the value of which is yet to be unlocked.
This is further complemented by existing infrastructure and excess mill capacity, which gives us the potential to convert exploration success into production and cash flow on an accelerated time line, and the combined experience of our new senior management and operating team, along with our 20-year operating history at LDI reduces our operating risks.
It's worth pointing out that both the CEO and I joined the company in the first quarter, and we have a new CEO joining in a few days.
By way of background, the company is listed on both the New York and Toronto Stock Exchanges. We have a very liquid stock trading almost 2 million shares per day on both the exchanges – between both exchanges.
We have a strong following amongst institutional investors, and there are 10 sell side analysts providing independent research coverage on the company.
Our share price has been under pressure much like any other mining equities. However, this also presents a compelling entry point into the stock.
Turning to the balance sheet as of June 30, the company had a cash balance of $44.8 million, a $26.7 million in networking capital, including the recent closing of the second tranche of the flow through financing, the pro forma cash position at June 30 was $54.4 million.
Based on the current forecast, we believe that our current balance sheet, together with cash flow from operations, provides sufficient financial resources to complete phase I of the LDI mine expansion and establish our operations for improved financial performance in 2014 and beyond.
Before I get into a more detailed overview of our flagship mine and our development plans, I want to spend a few minutes to talk about the palladium market because palladium is a key value driver for NAP.
So, I also want to spend a few minutes to discuss future prospects. In fact, palladium is one of the best performing metals this year.
Looking at mine supply, global mine production of palladium is relatively small at only 6.5 million ounces per year. As a rare precious metal, there are very few palladium-producing regions worldwide, and it's highly concentrated in mostly two countries – Russia and South Africa account for over 80% of the volume.
Increase in the supply is unlikely largely because of political, infrastructure and labor and cost issues in South Africa, decline in palladium production in Russia, and there are no significant new mines in the horizon in the near term.
Another source of Russian supply for decades has been from the government stockpiles. While over the past few years, it's believed to have contributed about 1 million ounces per year into the market it has always been seen as a major overhang on palladium price.
This stockpile now is widely believed to be nearly depleted or at least not significant anymore. This has been somewhat of a game-changer for palladium market as it has solidified the deficit going forward.
Turning to the demand side, the primary source of industrial demand continues to be from the gasoline automotive sector, which consumes about 67% of world palladium production for the manufacture of catalytic converters.
More importantly, the demand for the automotive sector is forecasted to increase annually with most of the growth coming from the BRIC economies, where there is emerging effluents, very low penetration of vehicle per capita, and importantly the affordability factor is high due to low interest rates and leasing programs.
Underpinning the demand for catalytic converters is a global adoption of emission control standards that mandate the use of catalytic converters. As these emission standards get more stringent, these will translate into increased palladium usage in the catalytic converter.
Another source of demand is palladium ETFs. Like gold and silver, palladium is increasingly viewed as an attractive precious metal that can help diversify investment portfolios. Together, ETFs hold over 2 million ounces.
Since their emergence, palladium started to increasingly behave like a precious metal. It still remains a fundamental underpinning of an industrial metal because of the automotive demand.
To sum up with no supply growth and growing demand, the stage is set for a sustainable rise in the price of palladium. And although forecasters have different price targets, the consensus is that palladium will continue to rise from its current level of around $7.20 per ounce.
Given this outlook we believe the timing fits well with our plan to invest in our palladium mine to establish NAP as a low-cost producer. And that brings me to our LDI operations.
The LDI mine located in Thunder Bay, Ontario is one of only two primary mines in the world.
We've been in production since 1993, and for the last couple of years we've been investing in our mine expansion to transition our operation from ramp haulage to shaft haulage.
The goal of this expansion is to increase our underground throughput and reduce our cash cost per ounce.
Additionally, we have a 15,000 ton per day mill with significant excess capacity for production growth.
Based on what we see is attainable today, our current vision is to increase annual palladium production of up to 250,000 ounces at cash cost under $300 per ounce, and we believe that is achievable by 2015.
When looking at our operating performance this year, it's important to recognize that 2013 is a transition year for us. It also underpins how critical it is – it will be for us by enabling us to increase our throughput and lower our costs through use of the shafts.
The first phase of the mine expansion has been focused on sinking the shaft to the 825 meter level, which I'm pleased to say we reached last week, and commissioning the shaft to start hoisting more, reducing our reliance on the ramp system, which incurs more costs. It also included other construction work required for infrastructure, underground, and on surface, most of which is now completed.
To give you an example, for a truck to take the ramp down to the 825-meter level, loaded with ore and then take the ramp back to surface that round trip will take about an hour and not to mention incur more diesel and manpower costs.
Once the shaft is up and running, the same haulage to replace that 45-ton or 50-ton truck will take three [skip] [ph] loads, which would be approximately 10 minutes and more importantly we'll be able to move more tonnage on a daily basis.
Phase I is now approaching completion in Q4, and we remain on target to start hoisting ore through the shaft at the beginning of the fourth quarter. This will be a critical milestone for our company and a real game changer in improving economics of the mine, as we start to realize decreased costs.
Beyond Phase I, our vision remains to reach the 25,000 ounce per annum production rate by 2015. So, we're looking at additional opportunities to augment production to reach that goal.
Initially, the plan was to continue expansion at depth and continue the shaft sinking although now we're looking at some lateral targets that will cost less to develop and allow us to [defer] [ph] the shaft.
Some of the lateral opportunities that are currently being assessed include opportunities in and around the Roby Zone, which is historically mined at a cutoff – at a higher cut-off grade of approximately 5.6 grams per ton of palladium.
We're investigating a potential to expand to the southeast and northeast, the economic potential of lowering the resource grade in the footwall, and we are able to delineate an additional cell for the lower northern part of the zone that could potentially be still developed. We are also currently drilling in the Upper Offset Southeast target, which would be ideally situated near the shaft.
Collectively, these lateral targets could contribute meaningful reserve and resource gains that could leverage existing infrastructure.
As I've explained, given their location, the development of these lateral targets would cost less than expanding the mine of depth. Hence, that's where we shifted our exploration focus.
We are currently evaluating these targets through validation and conversion drilling, resource estimation, engineering studies, and economic analysis to be followed by detailed development planning.
Another opportunity we're investigating is a viability of changing the mining method for certain deposits of LDI from (inaudible) to sub-level block caving.
Sub-level cave method, which appears to be attracted for the offset of some ore body is essentially a mass-mining method that we reduced development in mining costs, while increasing mining volumes.
Although too early to commit to, yes, if we're able to change to this mining method, it will be another game changer for us.
Some of the benefits of sub-level block caving include reduced capital expenditures over the current mining method, increased reserve and resources by being able to lower the cut-off grade, increased production levels, and lower the overall cost on a per ton basis.
We recently engaged in external engineering for an interim analysis of this opportunity. As part of the analysis, we plan to do a test walk likely in the first half of 2014. If the test is successful, implementation could commence later in the year.
Turning back to exploration, we have a significant land-holding that historically had minimal exploration. A total land package Ontario now comprises over 62,000 acres, covering the most perspective (inaudible) complexes in the PGM signatures in the LDI region. There remains significant exploration upside near the mine giving us increased confidence that will be mined at LDI for many years to come.
The exploration upside is further complemented by LDI's existing infrastructure and permits and the excess capacity at the mill. So, that somewhat, our plan is very straightforward to produce more for less.
First, we plan to transition to shaft mine. This will be the first key step change that will enable to increase production at lower cost.
Second, we must fill the shaft. So, the plan is to continue to investing in exploration to pursue organic growth opportunities.
And third, we must fill the mill. So, we look for opportunities to maximize our existing infrastructure.
Our main bottleneck right now lies in the mining method. Both our shaft and mill can handle more throughput than what we plan to mine so the focus of our strategy will be to maximize those assets to improve our operating margins.
Before I wrap up, I'll briefly go over some of our upcoming milestones.
We're targeting to start hoisting up – or up the shaft in the beginning of Q4. We intend to provide an update on our future development plans in Q4, including an update on the viability of the new mining method, and we plan to release updated mineral reserve and resource estimate in January of next year.
In closing, I want to reiterate what NAP offers investors – leverage derived in palladium prices, a clear strategy to increase production of lower cash cost and attractive PGM investment jurisdiction and upside in exploration and development.
Thanks for listening and I'll now be pleased to answer any questions you may have.
Thank you for the presentation. To the first significant digit, what do you think the cost of the shaft in development and related improvements would be?
I'm sorry the Phase 1? Or...
Of the whole thing of doing the shaft and then developing the underground workings to supply 15,000 ton a day.
The all-in-costs – or I'm sorry, the 15,000 ton a day, we need the resources we have to certainly go down to the second level. But today, our spending, where our expectation for the shaft and all the surface infrastructures could have been about $400 million.
Anymore from the audience?
It's not really – there's not a big cost to that. We've actually identified an area, which is between the bottom of our open pit in the top of the Robi zone, which is mineralized material. It was lower grade. And because sub-level blockade allows you to drop the grade significantly. But a lot of what we're looking is probably,– we have enabled – 400,000 to 500,000 tons grade is under 2 grams per ton.
But the cost is negligible. There is no infrastructure cost that has weighed on infrastructure, so there's no capital. It's just a question of putting the structure in place in the mining of those. So, we don't see it being an incremental costs for that test block.
And if I could just follow on to that question. Is there a sense of what the cost savings could be by transitioning?
The thought – yes. Right now, we're thinking it's probably $10 to $15 per ton mined, in terms of getting into use of sub-level blockading versus [long-haul silting].
Okay. Super. See if there are any more questions.
Okay? Well, if there's no further questions, well thank you very much.
Thank you very much. Everyone, have a good evening.
Now, wraps up our afternoon. And just for – by way of public service, there is the special opportunities reception taking place at 5:30, which is on the fourth floor in the Capital Ballroom. So, thanks very much for your attendance this afternoon.
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