North American Palladium's CEO Hosts Investor Day (Transcript)

Oct.21.13 | About: North American (PAL)

North American Palladium, Ltd (NYSEMKT:PAL)

Investor Day Conference

October 21, 2013 12:00 pm ET

Executives

Philippus F. Du Toit - Chief Executive Officer and President

James E. Gallagher - Chief Operating Officer

David C. Peck - Head of Exploration

David Carlo Langille - Chief Financial Officer

Kevin Small

Philippus F. Du Toit

So good afternoon, ladies and gentlemen, which is for us at North American Palladium, a rather special event. It's not quite Christmasy yet, but very, very close. That's why there's a little bit of a gift on your table. It is truly a special event for us, and thank you once again for joining us. For those whom I haven't met before, I'm Phil Du Toit, the CEO for the North American Palladium. And I'd just like you -- I'd like to introduce the

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to my right, I've got Jim Gallagher, our new COO. He's joined us, Jim, it's 3 weeks, 4 weeks now?

James E. Gallagher

Starting week 4.

Philippus F. Du Toit

Starting week 4, veteran. Jim is a very experienced individual in the mining industry, and we're very pleased that after he's done his due diligence, he decided to join us. We've got Dave Peck. I think most of you know Dave Peck. We've got Kevin Small, responsible for the technical aspects; Dave, responsible for exploration. We also have Dave Langille, our CFO, our -- truly our minister of finance. He's here today. We've got Cameron, Cameron Mclean, looking at exploration. Legal is Tess, Tess Lofsky. And very important, the person who put it all together today is Camilla Bartosiewicz, our Investor Relations person.

So before I hand over to the team members, the objective of today is really to share with you some of the key milestones we set up for ourselves for the 2013 year and the status on that, and a little bit on our strategy, where we are in moving forward from those milestones. And just a short reminder, we are in a quiet period. And unfortunately, we cannot divulge too much information on the production and finances, et cetera. And so bear with us. Our results, Q3 results, will come out in about 3 weeks time when all that information will be available. So I'm afraid we'll have to stick to the agenda points we have today as far as we can and we would appreciate during the Q&A session, which we've allowed ample time for, that we'll focus on these.

What we will see today? We'll see a brief overview on the operating history. We also will see the shaft status, and that's really one of the key events for us today is, as you know, we -- our first skip with material started last week, and we're now truly in the commissioning phase and ramp-up phase after shaft. We're very excited at NAP, as this is one of the major milestones for us to put us into a good position in going forward to getting our volumes up and getting our production cost down. So far, so good. We've set right out at the beginning of the year that by end of quarter 3, we want to see the construction behind us and early quarter 4, be in the commissioning phase, and then quarter 4 ramp-up to capacity, and that will probably take us a quarter or so into 2014. But we are largely there today, and so that's great. And all our Q3 milestones for the end of quarter 3 2013, we're pretty much on track with that.

So the transition to shaft, well, it's quarter 4, we don't see as a smooth quarter for us, to be quite honest. We are in the commissioning, and a lot of things can go wrong during commissioning of any system. But fortunately, we're not testing in the commissioning new technology. It is proven technology. It's basically material-handling issues, it's material-flow issues, it's equipment reliability that usually shows some problems early on, and that is what we need to overcome in this quarter to really iron out all those problems and fire up this system in anger.

Lateral exploration and development targets, I think some of you might be aware of those issues that we're really focused on, because if we look at the ore body, and Dave will tell us a little bit more today on that, we've got some opportunities that we can access ore a little bit shallower and closer to the shaft tipping station, and that is we will really go after that in anger for 2014.

Then bulk mining method, if we look at the ore body and it will become evident to you, as Dave will take us through the ore body, that this ore body is very amenable to looking at alternative mining methods we have been studying, sublevel blockading as one of the methods, and certainly, the study is progressing well and it's highlighting some issues for us that we've got to take care of. But we are on track to complete studies in 2014 on alternative mining methods. And Jim will tell us a little bit more about that.

So maybe just before we move on, the usual, the cautionary note on forward-looking statements, I'll give

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just to digest that. And I think most of you are very familiar with these statements, so maybe we can go to more of the presentation just now.

To queue opening remarks, during our AGM earlier in the year, we did say 2013 is a transition year for us. We're transitioning from the Roby ore body into the Offset Zone ore body, with its related difficulties and its related issues in terms of material flow, et cetera. That is pretty much on target as well, and we've made good progress in that, although it's not completely finished. We've got some development issues to complete and then some ore-handling issues to be done. But it's largely on track. The shaft changeover is in the process of happening, and we do expect Q4 will have its challenges.

And -- but we believe also, seeing that we're not testing any new technology that the Q4 challenges, we've got a good team on site now and we are ready for those challenges. The focus for 2014 would really be to consolidate all the changes of 2013 to bring us back into operational profitability.

So the focus for 2014 obviously is, first of all, to minimize CapEx. CapEx is a scarce commodity. We want to really minimize that as we have got 5 years-plus of all there to mine. So if we delay Phase II, we feel comfortable with some of the other developments we'll supplement and that we will -- a delay of Phase II will not have any detrimental effect on our production volumes. And that is purely to put us in a better position from a CapEx perspective, and we also need to do further planning in terms of alternative mining methods, the bulk mining methods, to make sure that Phase II is very well defined and very well set up for us. That's all planned for 2014 now.

Focus on OpEx. We really want to optimize our operational expenditure. The shaft will help a lot. We've got other areas that we're focusing on, too.

Volume growth. We obviously want to grow the volumes in '14 well above to the '13 levels that we'll achieve, and the shaft will help some of the easy pickings on the lateral development, will also help with that. And we want to optimize utilization of the surface infrastructure, make sure that we've got very good recoveries in our role.

And then as we've mentioned, the alternative mining methods, we're quite excited about that, but I don't want to say too much about that. Jim will allude to most of those opportunities we have there.

So with that, I would very much like to hand over to Dave, and Dave will take you through a short history and a bit of a -- I don't want to call it a movie, but it's a very good video of the shape of the ore bodies, what they look like, et cetera. Just to give you a very good overview. Dave? Thank you.

David C. Peck

Thanks, Phil. Greetings, everyone. A pretty exciting day for NAP. And as I hope we'll show in this presentation, some of the slides that we put together, lots of room for optimism and enthusiasm. Certainly, the management team is very, very encouraged by where we're headed as a company and the operations and looking forward to adding to the resource view at Lac des Iles. And if you think about things where we've come from, and I'll show you a couple of movie clips here, it's quite impressive that this ore body continues to deliver economic-grade resources after nearly 20 years of mining. It continues to deliver new zones, and we'll discuss some of these in my slides here.

Historical production to date, after 20 years of mining, about 3 million ounces of palladium. Peak production was reached in the mid-2000s at 300,000 ounces of palladium. And what we hope to demonstrate right now is that there's good reason to be optimistic that those production levels can again be obtained, and that ties to our cornerstone resource, the Offset Zone deposit, as well as looking at alternative mining methods and also lateral development opportunities. So hopefully, this will run.

So this is looking at the 1 gram per tonne shelf for the original Roby Zone deposit. You see it spinning around. This is actually a composite resource. It's a got a high-grade component on a hanging wall and that they'll show up here in a bright red color. That's based on a 4.5-gram cutoff grade, very high cutoff. And then the footwall side of the deposit generally runs a couple of grams over 10s of meters in width. So it's amenable to pit mining, which was done from '93 until actually just recently. And we've had open pit production ramping up in around 2002 when the new mill was constructed right there in blue, a 15,000 tonne per day mill. And then in 2006, our operations went underground and started to extract high-grade mineralization off of the Roby Zone on the associated ramp system shown here.

Look, I can switch this over. And now we're going to have a look at the Offset Zone. The Offset Zone was drilled out in 2000 -- sort of late 2000s, and it's quite a large ore body. It isn't finished. In terms of drilling, we're still converting resources. And really, what the Offset Zone is is the lateral extension, along strike of the Roby Zone, and it's shifted or displaced along this planar element here, the Offset fault, which is a North tipping structure. It has a high-grade component as well in the hanging wall side and the broad low-grade disseminated mineralization on the footwall side.

In 2010, we had a positive scoping study and decided to commence construction of the Offset mine with the vertical shaft shown there and the ramp in development infrastructure coming off the Roby ramp system. And we've been ramping up ore there as we wait for commissioning the shaft. There's the reserves in the gray polygons there at about 8 million tonnes just under at -- over 4 grams per tonne, and the resources right now have measured and indicated, including those reserves, are about 22 million tonnes of both 4.4 grams. So that's the nature of the Offset Zone, as we've currently published it. However, there's lots of potential to grow those resources through systematic drilling and looking at alternative mining methods.

We also have a view of other options to develop laterally off the edge of the Roby system as well as the Offset Zone itself, and then other exploration-stage opportunities on the Lac des Iles mine property. Here, we see the southwest end of the Roby pit, where we have undeveloped resources that we're looking at right now. The Roby high-grade zone extends to the south of the pit shown there in blue. We also have an extension zone coming off the northeast end of the Roby pit, which we looked at this summer, initial drilling on that, and a target coming above the Offset Zone deposit, hopefully towards surface, the southeast extension. We're able to put a small resource together on the Sheriff Zone. We have published that just recently.

And then looking at the geology at the entire mine property, local mine block intrusion, on the north side, we've encountered very high-grade mineralization over narrow widths, kind of conventional reef-style mineralization on the North VT Rim deposit, shown there, and we're looking at exploring, for the first time, systematically, the South VT Rim zone shown there.

A final area for exploration stage work we're looking at for next year is the Shorty Lake area, which is developed on the north-south structure, which just came up on your screen, adjacent to the Baker Zone. And these are opportunities, some near-term, all areas, so we've got a balanced portfolio of lateral-developed, some longer-term, different stages to keep in concert with the life of mine plan. So I think we're all pretty about potential for growing the reserve space at Lac des Iles, and I'll to turn it over to Jim Gallagher now to talk about the shaft project.

James E. Gallagher

Thanks very much, Dave, and thank you, everyone. I'm glad to be here. I am going to talk about the shaft project, really our signature event, which we will be celebrating on-site tomorrow with a grand opening and a bit of a ribbon-cutting ceremony, a bit of a game changer for the Lac des Iles mine. And then I'm going to come back in a few minutes and talk about what we're looking at to do to exploit the very significant resource that Dave has pointed out. And really, that will get -- and I've been asked this question probably by everybody I've met in mine to date, why did you join? I joined for the potential, and we're going to talk about that potential and the exciting opportunities for a bit of a long-term future here.

So the shaft is essentially complete. The entire ore-handling system is in final commissioning. What's the big deal about the shaft, really the, more than lowering some of the operating costs from the significant trucking that we have been doing with the ramp access mine production. Of 3 weeks that I've been here, we've been achieving about 2,500 tonnes a day of ore from underground, moving some waste at the same time, just over 3,000 tonnes a day. Trucking up from now, 825, very significant truck fleet, probably maxed out at its capacity. The shaft will eliminate 8 kilometers out of that 1-way haul. It's currently just over an hour per round trip for every truck of ore that comes up that ramp, and that's going to be cut down into the 10- to 15-minute range, still loading trucks on the 825 and the upper levels that we're still mining and bringing it into the new ore-handling systems. So significantly, a slight reduction in the trucking fleet because of the change in mining method. Some of the trucks will move onto waste movement and waste filling of stopes, but the real big thing, as I said, is it takes away that bottleneck and removes the cap on production that we've had. The mine development and the mine design is now at a point where, as we'll talk about, we're going to be able to ramp that production up over the next 1.5 years here.

So all of the services in the headframe, there are 3 hoist, an auxillary hoist, a production hoist and a service hoist. The service hoist still has the shaft sinking buckets on it. It will, in the next couple of months, be converted to a cage system. The headframe is essentially complete. This picture was taken just a week ago, and all of the clotting is finally complete. They're up doing the last little bits in this picture. Of interest, the steam that's coming out of the headframe was because they were performing yet another commissioning. And just off the picture, that's the new ventilation system that's been installed, and they actually were over-pressurizing the system. It wasn't commissioning on the fans. So in conjunction with the new shaft, we're also commissioning a new ventilation system, which is going to allow us and remove any restrictions we've had, as well mining at greater depths.

The final piece of equipment in the whole ore-handling system, which isn't fully operational today, is the underground crusher. We do have a waste system that ties into the shaft. The ore system has a crusher in the circuit, largely because of some extra rock work in the last couple of weeks in the crusher station. This is the legging event, mechanically complete, electronics being completed as we speak, and the current plan is that that system will be operational by the end of this week. So therefore, we're going to have a full ore handling system from rock breakers to a crusher, to the loading pockets, to the surface. All individual components other than the crusher have been tested. As Phil alluded to, the entire system working together at full production rates certainly hasn't been run yet, but every individual component has been tested and commissioned at its capacity. So really, the key is that we're on target to get above 3,000 tonnes a day of ore production, which we have struggled to do with the trucking fleet. And over the next 1.5 years, to 3,000 [ph], 3,504 [ph] and ultimately, over 5,000 tonnes a day in 2015, as the mine comes on to take full advantage of that.

Just quickly, the crusher station down below, that's the apron feeder. The crusher is off the back end here in this picture. And so we're ready to go. We're going to celebrate that on-site tomorrow, and it changes the dynamics on-site quite a bit. So I'm going to hand it back over to Dave, who's going to talk about some of the upper opportunities, and then I'm going to come back and talk about opportunities for large-scale mining on the lower part of the ore body.

David C. Peck

Thanks, Jim. Just listed, sort of the top priority opportunities. We saw some of these in the video clips. On the left-hand side, these are the near-term opportunities. One is most likely to come into our mine plan, assuming positive results from ongoing engineering studies and economic analysis. The Roby Zone northern block 6, we've talked about, and I'll show you a longitudinal section so you can get a feel for where it actually occurs. That's the one that's probably going to come into the plan soonest. The Roby Zone footwall is a very sizable resource there, and looking at various ways to tackle that in the future; and the Roby Zone, the southern extension, which includes the high-grade, as well as the footwall lower-grade mineralization. And then the lateral development targets in terms of exploration stage programs, they're listed for you there. We did do a program this summer, a pretty substantial drilling program exploration on these 2 upper-listed opportunities there, the upper Offset Zone, southeast extension, and the upper part of the Roby Zone, northeast extension. We'll be reporting on those results later in the year, probably December, with an exploration press release. And just for people's information, the entire mineral resource reserve statement for the company will be updated probably late January. That's what we're aiming for, and there will be a -- impossibly, some of these will start showing up on those statements.

Just now, looking at a long section of the Roby Zone, the north end, the Roby high-grade which is largely mined out, is the red polygon there, and you can see the ramp in development infrastructure going through it. The blue polygon there on the left-hand side is what we call block high-grade zone, relatively small, but good grade, and we're hopeful that this will come into the mine plan, next year possibly. And we also believe there's north and east, so we'll be doing hopefully some more exploration extension drilling beyond the limits of that block.

Looking at the Roby ore deposit, and a cross section of you now looking north, you can see this deep nature of the ore body and the hanging wall side having the high-grade, hosted by sheer cobalt rocks frequently called Pyroxenite. They're actually noritic rocks. And on the left-hand side, the footwall side, we have the broader sort of lower-grade Halo. And really, because of prices at the time when the high-grade zone went into production, the cutoff grade was quite high. That show you're seeing there was defined at 4.5 gram cutoff grade, which is actually -- are great for underground mining at Offset now. So the actual mine grade there is quite a bit higher than that. And what that means is there is a lot of high-grade material left in the footwall, and that's part of this footwall resource. So we're going to hopefully be able to maximize or optimize the value of what's left in the ground beneath the level of the Roby pit in this footwall zone.

And then looking at the southern extension of the Roby zone, this area had some problems before, partly because of stability issues on the pit, but also because the power supply lines were put through this area and will be removed shortly, and they're going to go down the shaft. So that opens up this target for a future development. We're still looking at the ultimate best way to tackle this, but these 3 zones together provide some flexibility for our operations and alternative feed for our mill going forward. So that's pretty exciting, and again, we'll update you with public information on this as we get more confidence on these studies.

On the exploration side and the exploration-stage projects, Lac des Iles continues to

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that are in exploration in terms of the distribution of ore. I'd have to say after being there for 1.5 years, I'm still not 100% confident on the deposit model. It doesn't fit any of the conventional models out there. It is its own beast, but having said that, we're

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a real confidence in the structural controls of the mineralization. This is leading us to new areas and new sort of exploration models, which we're starting to apply.

One of those, on the west end of that target, hope I'll press the right button here. Yes, okay. Right there. Just on the west end of this trend, we did a lot of trenching and mapping and really saw the interplay between 2 processes: high-grade mineralization along sheer zones; and also primary looking mineralization associated with a very dark narrow layer, a sort of a reef. And I think the interplay of those 2 processes is probably the explanation for most of the mineralization at this deposit. And hopefully, going forward, we can now apply these learnings and really tighten up on our exploration spending and get much better returns on those investments.

So the 2 areas we did drill off this summer, the Roby northeast extension up here, and the upper Offset southeast extension down here. We'll report on those results probably in the December press release and exploration update. And then the other areas, we'll start to work these up in a little more detail starting next year, North VT Rim -- sorry about that, North VT Rim -- one more time, Shorty Lake on the north-south structure there, and the South VT Rim.

Yes, for exploration, is, we all just like to have a portfolio, and a portfolio covering the range of expected life and beyond the life of mine rate now at Lac des Iles. We've got 5 years of reserves, and that's for sure. They're stated in our 2013, 43-101 report. In addition to the development opportunities we just discussed, looking at near-term gain options as well as exploration-stage projects, we've got a pretty attractive portfolio of greenfield properties. All of them are within 30 kilometers of our mill. They all have signs of mineralization. They're at very early stage of mineralization. And as time and money become available, we will start to resume our efforts to find the next Lac des Iles-type deposit on these properties.

So with that, I think I'll turn it back to Jim, who will update you on some work on alternative mining methods.

James E. Gallagher

Thanks, Dave. I think the exciting thing about Dave's opportunities that he's just talked about, they aren't currently in the reserve plan. They aren't currently in the mining plan. We're currently in the throes of the 2014 budget and evaluating which of those options we'll include for next year, so the really upside opportunity from what we have done to date. And essentially, this week, we're going to be evaluating those with Kevin's help on the end, and seeing which ones can add enhancers to the budget process for next year.

So what I want to talk about now is really the big opportunity. And I'm a visual guy, and the left versus the right is really what kept me really interested in joining NAP. As Dave has already pointed out, there is a significant mineral resource in the Lac des Iles ore body. On the left side is the current published resource reserve at 22 million tonnes that the mine plan had based on for the future, and it gives us 5 years of mining life. What is on the left is the 1 gram shell that Dave has talked about. 1 gram is not currently an economic cutoff. But we have been, in some of the modeling that we've been doing for other studies, been looking at cutoffs in the range of 1.5 grams. I will state that we have not proven 1.5 as an economic cutoff. We're in the middle of those studies, so that is not a statement that that currently makes economic grade. But at a 1.5-gram cutoff, the average mining grade will be in the range of 3 grams and the resource increases 3.5x from the 22 million tonnes that we currently have on the books. So that is a significant upside potential. In order to exploit that, we really do have to look at high volume and very efficient mining methods.

What's the benefit here? It is a large vertical ore body, very good ground. I spent a lot of time in the Subray [ph] camp, mining well below -- in a range of 1,500 to 2,000 meters. We're looking at most of this ore body being above that. The ground to date has been exceptional. It has allowed for some very large open stoping. As it gets deeper, as you would expect, that's changing slightly, but it's still very competent ground that can allow large-scale mining approaches. And the verticality and all being in 1 footprint really does open up opportunities.

One of those opportunities, a course that has been mentioned and has been in some press release, is sublevel cave. One of the lowest operating cost mining methods that you can have. You allow the ore body to essentially, or sorry, allow the waste around the ore body to essentially cave. You drill and blast in a very efficient method. The beauty to this is high productivity, lots

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very low fill cost, because essentially, the waste is caving in behind you. So it is used in many mines in the world as a very low cost, and some of the lowest-cost mine operations in the world do employ this method. And I've been fortunate in my career, both with Falconbridge and with Hatch, to travel quite extensively and see a lot of these. So I have been in some of the lowest-cost mines in the world, the Kiruna mine, which is an underground iron ore mine, and they still make money in it -- with that, probably one of the largest scale lowest-cost operations, Ridgeway mine in Australia and many others. So I've seen this, and I believe in some of the opportunity.

This study is about 50% complete. Kevin's leaning it with some consultants at this point. We have a new block model, which, again, we're looking at various cutoff grades, 1.5 being in the middle range. The mine design complete. We're starting to look at doing the geomechanics, which is absolutely critical sublevel cave and for some of the other opportunities that we're looking at. We're in the process of doing final operating and CapEx costing. One of the keys here is going to be designing a very large efficient ore handling system.

And we did talk about deferring the Phase 2 expansion. One of the technical reasons for doing that is to make sure that we build Phase 2 to accommodate the full potential of this resource. That would be maximizing the absolute hoisting capacity and challenging the hoisting capacity on a current shaft end system, making sure we go deep enough to recover the right amount of resource.

So over the course of the next year, we're going to be completing studies along these lines, looking at alternate mining methods and making sure we build the infrastructure to suit those. The other one, I cut my teeth at the kid mine up in Timmins, as a Junior Engineer, very large scale bulk cemented rock fill. There's some trade-offs here that I think are prudent for us to look at versus sublevel caving, less dilution in this kind of bulk mining, hire some in cost with backfill, but it can also be designed, and this ore body seems very amenable to this very large-scale type of mining approach.

So we will be doing trade-offs in the new year and completing both PFS and entering into a feasibility study on a chosen method later next year. And really, to exploit the full potential of the LDI ore body.

So with that, in closing, we'll hand it off to Phil, for final comments.

Philippus F. Du Toit

Thanks, Jim. I think in short, ladies and gents, you've seen exploration perspective, you've seen mining opportunities here, lower cutoff, what the ore body can do for us. We have the shaft in commissioning now. So 2014 consolidate all of this. Dave took us through the lateral development opportunities. So, really, I would say we're in a cusp of a very, very exciting time here for NAP. And the key for us now is focus on the transition to the shaft operations and realize the benefits of that higher cost -- sorry, higher volumes, lower cost.

Minimize capital spending, you've heard Phase 2 delayed, a lot of work to be done, but volumes are not compromised. But to make sure that when we're entering to the second phase development that it's the right one. We'll do it in such a way that the current mine plan is not really affected by it. We want to make absolutely sure we maintain mining rates, we maintain costs, and it's not a disruption in transitioning into the potentially new operation that will be designed next year.

Prioritization of lateral growth projects, absolutely key, because that gives us additional ounces for lower cost than what we would have anticipated for Phase 2. And there's plenty of that. And you've seen Block 6, for instance, where already we will incorporate that in the mine plan for '14 without any serious CapEx, because it's there. The development is there. Now that we understand the block and has owned a little bit better from exploration, we can access that. And then, also, here will be a self zone, we'll be doing. We have started with engineering work there. It's drilled off, it's high grade, looks promising. So Kevin's team is busy with the engineering to get in to that at low cost. So that's the lateral growth targets.

And then Jim took us through the investigation into the bulk mining methods. So really, that's our growth strategy. And as I've mentioned earlier on, for 2013, what we set out to do end of Q3, pretty much on track. Challenges ahead, no doubt. But with the team that we have on board now, we're up for those challenges. So that's the exciting position for us to be.

So let me just take one step back and just look at the bigger picture from a marketing perspective, where are we with palladium and et cetera. And I think this slide says a lot, with today with our share price being under pressure and the market taking review, won't let us see if they can deliver, leverage to rising palladium prices. We believe we're well positioned and we also believe, and I think most of you would agree with that, that the palladium is the darling metal at the moment, because there's a strong pool, there's a strong demand. And if we look at the growth prospects for palladium, we know that 80% of the metal is being supplied through Russia and South Africa. In Russia, as a byproduct, because of their nickel mine, Norilsk, and in South Africa because of a byproduct of the platinum introduction.

South Africa, currently, is going through some challenges, with regards to labor cost efficiencies and difficult ore body. So they do have their challenges. And Norilsk, same thing, nickel price being a little bit under pressure. They're chasing the nickel, so palladium is not the first price for them. And in the meantime, Chinese auto manufacturing, U.S. auto manufacturing is showing about a 3%, 3.5% year-on-year growth. Environmental legislation, tighter environmental control on emissions, big awareness campaign worldwide on that, is forcing countries to move to upgrade their emission control standards. So the demand for palladium is there. And we don't see a big growth, so we do believe that in the next foreseeable future, we do see that the supply-demand is slightly out of balance, and what will come from that is a price increase.

So we're well positioned. Shaft is going. We've got the ore. We have the commodity. We now have a very much focused management team to deliver on those, so we believe it's a compelling investment proposition and a good space for us to be in.

So with that, unless there are any specific items that my team would like to guide me, where I've missed some key issues here, I would like to hand it over to back to you on a Q&A session. And as I've said earlier on, if we can focus on the agenda at hand, it's a bit of a celebration for us. And we're right in the middle of our '14 plan and the CapEx and OpEx et cetera, so we cannot give you too much information on that, unfortunately.

But, please, ladies, gents, feel free. We leave it open. If you do have a question, just get your hand up and we'll get the mic to you.

Question-and-Answer Session

Unknown Analyst

I understand Europe's still in your plan. As you said, you can only give us certain information. But you've given us some information on how we can kind of estimate what your production numbers will be. But can you give us any color on operating costs? Maybe on a per tonne basis, where they are now? I know some of the alternative mining methods you're looking at probably won't be operational until 2015 or beyond. But in the interim, I'd just kind of like to get an idea on -- help us predict what your cash flows might be.

Philippus F. Du Toit

Yes. I can say that for quarter 1, 2 and 3, we were very close to our predictions, on a $1 per ounce basis. And we have to work very hard to get it down in quarter 4, with the shaft coming in to operation. And I think Dave you're pretty up to date with more accurate numbers, Dave. Would you like to comment on that?

David Carlo Langille

I can't comment on Q3 because of the blackout. But, yes, we're certainly interested in planning on getting the cost down in Q4 as the shaft ramps up, and a lot of it's just volume-based, as we increase the volume and the throughput we've got a variable FX cost which will spread a little bit more tonnes and more ounces.

Unknown Analyst

I think in Q2, you guys were $50, $55-ish a tonne, I assume, which is the numbers below that then next year?

David Carlo Langille

Sorry, yes, that's the expectations where people are at. But again, we're still going through the planning process. And I think some of us are going to stay up tomorrow after the ribbon-cutting, just to continue that exercise.

Philippus F. Du Toit

We've seen some good trends in Q3.

Unknown Analyst

Just on the existing resource now. I mean, you're getting the shafts obviously commissioned, which is a great positive. And -- but almost immediately, with the new shaft, the clock is ticking on the reserve. You've got 5 years, you pointed out, the lateral extension here shows some promise. But do we have any sense of how much more time these lateral extensions are buying? And then what's the timeframe between really needing to commit to developing the deeper part of the offset zone, which really holds the future and the longer-term reserve potential for this resource?

Philippus F. Du Toit

That's a good question. You know I can give you a very brief sort of timeline. For '14, I said, as a consolidation here and a study here, even if we commit to the alternative mining method sometime in 2015, it will still be adequate time, as I've said. We've got 5-, 6-years there that we can mine, at very attractive rates, for absolutely acceptable costs. And it will take us the best part of '14 for those studies, excluding the lateral development parts, because some of those lateral development parts already been drilled out. So it's basically the engineering studies. And Kevin's team is making good progress on those, so they will come on probably buying us another 2 years. So we feel very comfortable that we're not squeezed for time and jumping to the wrong conclusions. But we'll take a deep breath, take a step back and make sure that we absolutely take the full potential of the ore body. So we're in a safe position there.

Unknown Analyst

Can I ask one more? Okay. So the next question was just on -- I appreciate that. That, I think , is a question that wasn't really obvious to a lot of people. On the near term, though, you mentioned a lot of risks are still, and you've mentioned several times, the challenges, the challenges, the challenges in the near term are ramping up. Do you want go into a little detail on sort of what the main ones are and what mitigating measures you've taken?

Philippus F. Du Toit

Yes -- no, that's a good point, because that's been keeping the team awake for quite a while. Usually, when you bring a new shaft in operation. You've got shaft experience on the mine. We haven't got -- we've got ramp-up experience. So we've got to make sure we've got the right people. We had a recruitment campaign, recruited some good people. We've got our standard operating procedures pretty well there, but now it's like almost a guy getting a brand-new Formula One racing car, he's got to take it around the track. Will he do a qualifying time in the first round? I doubt it. You've got to test the brakes, test this, test that, a few things. And that really what the risk is for us. It's a combination of a few things, and let me start at the bottom. We're also transferring from Roby to Offset, which required new development, and we had to open at least 3 working stopes, which had its challenges into the new ore body. And because of rock issues, we had to change the stope designs. So all those things we knew and was a transition for us. We're pretty much through with that now. Now, I've got to think, all that material has got to go to a tipping point for the shaft now. There are some traffic issues, there are some loading issues. The other issue is typically ore size. We've got grizzlies and rock breakers, but we've got to make sure that we can mine these stopes in a controlled manner, that the size of the material is quite acceptable to the system we've designed. Maybe a little bit of experimentation in drilling Batten and down refractoring the blast holes, a whole host of things. So it's really a combination of all those things that we've got to make sure. It's people, familiarity, standard operating procedure, making sure the sizing of the muck is good for the ore handling system that we've designed, and it's a combination of those. And as Jim also alluded to in his talk, we've really wanted to ramp up the tonnage of the ore pretty quickly. So we're going to utilize the shaft for the ore. And if we do have any ramp up issues, we probably have to take the long ramp-up with the waste just in the interim. So we're looking at all those fallback positions as well. The other risk is early equipment failure, manufacturing processes, these days are not absolutely full proof. If there's electrical problems, component failures and so on, we believe we've got adequate access to the right strategic spares, but these things do happen. And those small delays usually add up. So it's the availability, mechanical availability, electrical availability and a combination of all those other things we've got to watch. All I can say is thank goodness, it's not brand-new technology at all. It is proven technology, which is a great help to us.

James E. Gallagher

If I can add to that, I'd like to add one more point, am I 100% comfortable today that we have all the right resources in place to run a shop operation [indiscernible] availability? Not 100%. That's changing. And as you all know, the mining industry is certainly in a low period. People are becoming available. LDI has been challenged as many remote operations have to get all the right resources on-site. We have, in the last week, hired a new General Manager starting next week. A very strong individual that I worked for -- worked with before at Falconbridge. We've hired a new Maintenance Manager who is very experienced in shaft and hoist, that was what we were targeting. And he's already dumped some resumes in our inbox for maintenance personnel to make sure that we can run that. So Phil alluded to some of those challenges. I wish we were there a couple of weeks ago and already had those people in place, but that's starting to happen now. So -- and in general, not just around shaft and hoist, people are starting to become available. The gold industry -- there's nervous people in the gold industry. We're starting to see resumes of the quality that have not been coming in to the inbox at LDI in the past. So we see that as a very positive point.

Philippus F. Du Toit

Thanks, Jim. Who's moderating the questions? I think the lady over there? Lady over there, okay.

Unknown Analyst

Okay. I'll make it quick. Just following up on the cost side. I know that a little while back, $200 to $200 per ounce was the target that you're hoping to get to. Is there a number now that you're hoping to achieve, anything that you can guide to in terms of dollar per ounce?

Philippus F. Du Toit

You know we do have quite a stiff target for ourselves, but we would prefer to go through our exercise, which Jim and Dave talked about this week, finalized the '14 plan and the life of mine plan, and then give proper guidance on the pricing there. We obviously want to bring it down as low as we can, and we can see considerable improvement coming our way over the period, but I would prefer for us to do the work properly and give proper guidance.

Unknown Analyst

Okay. And then just if I could ask one more question. Just on the trade-off studies that are being taken -- that are being conducted right now in bulk tonnage, can you just go through the timeline in a little bit more detail in terms of when the PFS is suppose to be done and when the feasibility and whether those studies will be released or just a final decision? And then also, if there's one thing, I guess, concerns you about changes in the mining methods, what would that be?

James E. Gallagher

We expect to complete the current scoping study towards the end of the year. I expect that we'll be on the Street before the end of the year for a PFS, partly based on the results of that scoping study and some of the other bulk methods that we've talked about. That would normally take 6 to 8 months, I believe, to complete that. And so we should be, in feasibility, on a chosen option, in the last quarter, I think, of next year, and that will give us some pretty clear direction of where we think we'll be going. In terms of changing mining methods, the site currently does employ a large scale blast hole mining method. Some of the systems to support that perhaps aren't where they should be. And I do believe, having looked at it over the last few weeks and actually for a period before that, there's probably optimization opportunities in the current approach, which is really what we're going to examine with the Phase 2 studies. So I think even to address the question, which was a good question, there's 5 years of reserve, but if we're able to change the game a little bit and add some of that halo into the current mix, that is where we're already mining, and it really means just stepping back a little bit further into the footwall and adding to those without having to go deeper. And so that's why we're a little bit confident that 5 years really isn't the timeframe that we're staring at. Once we prove up and get the right systems in place, we can incrementally add to the rate of the ultimate plan at some point in the future. So, did that address all the questions?

Unknown Analyst

Yes.

Unknown Analyst

Jim, just on -- in terms of the sublevel cave, as one up, I followed Ridgeway pretty closely when they built that. And it was -- back then, before the capital cost escalation, it worked out really well, but it was very capital intensive from the beginning. Now you've already built the shaft, or at least half of it, et cetera. Can you give us some thoughts as to the capital intents, you talk about the mines you've seen in terms of implementing a sublevel cave operation upfront?

James E. Gallagher

Yes. We haven't even finished the capital operating cost side of things...

Unknown Analyst

I'm talking about the mines you've seen. Forget this one.

James E. Gallagher

Yes. So capital, all upfront. As you've stated, a lot of that infrastructure is partly in already. The shaft would have to be deepened, of course. Some of that was already in previous studies completed. As I'd say, we may actually want to go deeper. We may want to change the ore handling system from what was in the previous studies to go bigger, more efficient. So obviously, it may be slightly higher, but that's traded off with much higher tonnage. So yes, we would expect that CapEx, on a big plan, to be higher, but there's much larger ore body than the 22 million tonnes. So...

Unknown Analyst

I guess my point is, for sublevel cave, unlike the operation you have now, is more front-end loaded in terms of CapEx, getting the infrastructure [indiscernible] up and a lot of people in this room would not be familiar with that. So when you go into that kind of operation, there is a big time component and a big CapEx component of it.

James E. Gallagher

So one of the opportunities, because of this very large halo that's around the ore zone, and one of the things that Kevin's team has taken into account, there is much more development upfront in the sublevel cave to get it started. The development currently is laid out inside the halo. So -- and on any economics we've run, you wouldn't go and primary mine that, but if it's already been drilled and blasted as development, it will make slight cash flow in the process. So it really does change the dynamics of all of this pure development inside a waste versus inside a halo, where it makes economic sense to actually put it through the mill. You're going to have to move it from the mine, you've got to hoist it or truck it up somewhere. It essentially is free sitting on the surface and there is economics to running that through the mill. And that helps the economics big time here.

Philippus F. Du Toit

I think on that -- sorry, Jim, what we see is a potential CapEx element is the ore handling underground. But Jim's right, on the development side, we're there, the shaft, we're there, the service infrastructure, we're there. So the ore handling underground will take CapEx and that is what we study.

Unknown Analyst

Can I ask a second one? In terms of the class going forward, maybe you can help us a bit. Now you're going to stop or slow down the operation from the [indiscernible]. What kinds of things will dissipate? You're going to run less trucks, what else? What kinds of costs will follow? Will your manpower fall off slightly now as a result of using the hoist more? What kind of...

James E. Gallagher

We're going to have a slight decrease in the trucking and the trucking fleet and the manpower that goes with that. But some of that is being transferred. The lower mining method requires in-tank fill, where we've had delayed fill-up above and more. So some of the trucking will be converted to moving and placing waste fill and cemented fill. But the bottom line is the workforce will stay about static and the production rate will increase quite a bit. So it's really that divisor that's going to change the game for us. Again, we're finishing the budget. We don't expect the workforce numbers are going to change dramatically from where they are, but the divisor is going to go up quite a bit, and that's really -- getting the rate is key. Somebody already said it, filling the buckets in the shaft is really key to the game moving forward here.

Philippus F. Du Toit

And we can see a slight reduction in energy cost, buying of diesel, because of less diesel consumption. I think there was a lady at the back there that -- yes?

Unknown Analyst

I'd just like to ask for clarification a little bit here. How much of your technical work has been done underground for you to be so confident of the competency of the rock, maybe in light of what was just said that some stopes had to be redesigned in lieu of ground control conditions in the previous quarters? Maybe you could just clarify that.

James E. Gallagher

And maybe I'll let Kevin jump in here. But I'll start off. The ore body has been modeled. The mining method on the 825 level, which is the current mining method, has been changed, requiring cemented fill based on geomechanics modeling already done. So that change in mining method from the very large open stope delayed film method that was used up above is based on geomechanic studies. I think task did modeling of the ore body, Kevin, I'll let you finish that because you know the history better than I do.

Kevin Small

Yes, what happened when we were transitioning from Roby to the Offset, the Roby was in a late stage of mining and had some highly stressed pillar areas and rib pillars and when upon putting those into the production plan, that's where they ran into difficulties. Holes squeezing blast not going off well and having a general overall recovery problem, in other words, leaving a lot of material behind. And that was because -- mainly because of the stretches due to the shrinking pillars in the Roby, and that's what caused some of the redesign in the Offset. So all that was modeled. We have extensive databases on the actual rock properties and how it trend -- how it reacted during the stress changes during mining. So we had an extensive database, and we've also done some over-quarrying to get our virgin stress fields that we're well set up for future geomechanic and geotechnical work in the offset, as we go deeper.

Unknown Analyst

Just a follow-up on the exploration side, how much drilling would be required to firm up all these satellite targets that you have identified as opportunities for the shorter term?

James E. Gallagher

Yes, the sort of longer-term targets there will be done in stages, obviously. So I mean, it's a pretty hard question to answer. We look at it as a portfolio and managed portfolio, as the mine needs resources, the focus is there. So typically, you've seen the last sort of few years, we've been putting up anywhere between 1,500 thousand meters between Lac des Iles and the mine property -- sorry, the adjacent properties, I would expect something around 50,000 or higher, but that depends on capital, depends on our operating budgets. And it really depends on the mine plant. But anyone of those targets. You look at North VT, we do that systematically. We've learned a lot about that. So we'd start with trenching. We did expand the trenching. Get the surface mapping and the surface information done and then really do very widely spaced, kind of we call it, sort of delineation drilling is the mineralized zone there is it wide enough [indiscernible] an upgrade. That first pass then dictates whether we go after it and where it might fit in to the long term. So any one part of that North VT could be 50,000 meters on its own and is big enough. So I can't really answer on the long term. It's sort of results based. And we're really at an early stage. On the near term, they're drilled off, so there might be a little bit of, maybe, conversion or even infill drilling just for the engineering. But most of those are already done to measure an indicated non-compliant. But In our internal view of it, there are high confidence. So there'll be a need for exploration, as we go forward, to keep replacing what we're mining. And I think the numbers we put up the last few years as something around that would be sustainable. That's what I hope anyway.

Unknown Analyst

Jim, I've got a 2-part question. If you could just confirm that the concept would be that you can reach 5,500 tonnes per day without deepening the shaft on the existing mine plant and extensions and the laterals, if that's kind of the direction you're heading? And then secondly, with these alternative mine plants, is could you exceed 5,500 tonnes per day, conceptually, based on the [indiscernible] of the shaft or these potential, or maybe even give us an idea of the ranges that you're thinking about?

James E. Gallagher

The 5,500-tonne a day target includes some of the lateral work that Dave has been referring to. Some of that is very close to surface and it actually makes more sense to truck it to surface than actually try and get it in to the ore handling system. So with that combination, we're reasonably comfortable we can hit that. It's going to be more of a trucking scenario. The shaft, and Kevin knows the numbers better than I, so if I misquote -- is capable of at least 8,000 tonnes a day. And that's actually at greater depths. So from current hoisting levels, the skipping capacity is not a bottleneck. It'll be more the mining process feeding it. So at depth, depending on what the ultimate depth is, somewhere in the range of 8,000 tonnes a day and we're going to do further studies to really find that optimum number, because it looks like we might be constrained by that number rather than by what the ore body can deliver, and maybe that's not bad. It gives you a good target to shoot for. So we are definitely in the range of 8,000 tonnes a day hoisting capability with that system, with the full shaft, and it's whether we can design the mine to match that or not, quite frankly.

Unknown Analyst

Is that 2 levels? You'll be mining kind of a middle slot and then the deeper slot on separate mines? Or is that...

James E. Gallagher

The current plan does leave a sill that allows you to mine from 2 horizons. Whether we keep that plan or more of a -- if it's sublevel cave, then it's progressive down, it really depends on what the final design looks like.

Unknown Attendee

Phil, I was just wondering if you could talk a little bit about the dynamic between the engineering department and the finance department over the next couple of years. Is the finance department going to tell the engineering department what it can afford or is the engineering department going to tell the finance department how much money it needs to raise?

Philippus F. Du Toit

Very, very good question. I think for 2014, the finance department is clearly in charge. They will tell us what we can afford. And hopefully '15 and '16 and '17 we'll be in a position we're buying or making significant cash flows. And the engineering and finance department will work very close together to invest in the highest yield investment opportunities. But for 2014, as I've mentioned earlier, we are CapEx constrained. We recognize that, that's why we want to bring the shaft in production as soon as we can, start to recognize it -- the advantages of those savings, while we really take a very tough look on our CapEx.

Unknown Attendee

Just curious about how the location of the shaft and the surface infrastructure factors in to the decision around sublevel caving. Is that location of those things a big concern in doing that mine plan? Or is it more just a case of looking at the dollars in sense of the extra dilution and the costs versus the other methods you were talking about?

Philippus F. Du Toit

No, it's a very good point, and this is what's been currently looked at in the study. What is the effect on surface infrastructure? What is the potential effect on the shaft? What is the pillar we could allow for around the shaft? And what if it sort of propagates right to the surface? What will happen to key surface infrastructure like the dewatering and all of those issues? That's very much part of the study at the moment, and that features into the engineering and other things. Very important point.

Unknown Attendee

Will there be surface subsidence, or would you try to avoid that? And then other permitting concerns, if there is any?

Philippus F. Du Toit

Well, obviously, if there is surface subsidence the way we've got key infrastructure, that will take time and cost to replace. We would like to avoid that. We're not going to run risk there. The shaft, it's going to be protected property, the right methods and the right engineering calculations there. Make sure that is protected. And this is what Jim alluded to in his presentation of alternative methods. What can we do to maybe avoid some of that? But right now, the footprint, if you look at it in plan, the effect of the sublevel on the footprint is under investigation right now. And then we will see what other alternative methods on both mining, as Jim pointed out, can be employed not to have certain effects on certain surface infrastructure. It's key, absolutely key for us. Good point.

Unknown Attendee

In terms of the lower levels, now that you've finished the shaft, I know you're not deepening, what kind of drilling is in 2-year study on the ore body, if I want to do some more drilling in the lower portions of the offsets zone, what is the plan for that in 2014, or what are you thinking about?

Philippus F. Du Toit

Our view is we don't want to do drilling from the surface for the lower offset, so we try to do it from a drift that will develop as we take our ramp down. So the idea would be to finish the ramp-up to a certain level, do an exploration drift, and then get the exploration team there from that ramp. Dave, please, you must step in here.

David C. Peck

No, it's great.

Philippus F. Du Toit

And that is the plan for 2014, to see what is the right level to drill the underground from. We've got a bit of time, and we want to make sure we do it efficiently.

Unknown Attendee

So it could be 2015 before you actually start drilling from where that level is, is that true?

Philippus F. Du Toit

Yes. Hopefully, it will be before that, but yes, it's possible, and that shouldn't affect our production levels. But yes, you're right, it can be.

Unknown Attendee

Just a couple of small things. Block 6, what's the grade in Block 6?

Philippus F. Du Toit

Grade in Block 6 is -- in the region of 4.5 to 5, we'll probably use a cutoff of about 3.5 to 4. I'm looking at Kevin and Dave here. It's high grade.

David C. Peck

It's high grade.

Philippus F. Du Toit

Dave?

Unknown Attendee

How many tonnes?

Philippus F. Du Toit

About 6 tonnes. Kevin?

David C. Peck

It's not published. We haven't published it yet.

Unknown Attendee

Finally, the 2,500 tonnes is what you've done, the hauling average, that's what you're referring to, nothing to do with any shaft, right? You mentioned 2,500 tonnes a day is what you've been doing and that's what you been doing under the haulage system.

James E. Gallagher

On average on ore and there's about 600 to 700 a day on waste for the ongoing development program, so it's just over 3,000 tonnes a day coming up the ramp and in trucks.

Unknown Attendee

I've been reading recently about Anglo-American developing and put a lot of money behind a revolutionary method of blasting and extraction should be particularly suitable for the gold mines but also for the platinum mines in South Africa. If this is successful and comes onstream very soon, it may start affecting the price of the metal. I believe it could be something one should take into account. Have you read anything about this? Can you tell us?

Philippus F. Du Toit

Bill, unfortunately, I don't know the details. I'm aware of methods that they want to employ because they've recently come to an agreement with the new union about the layoff plan that they had and the number of shutdowns they wanted to do. They're under serious pressure to reduce their costs, I'm aware of the exercise going on. Understanding the details of the different extraction or mining at the bottom, no, we're not up to speed with the details, but we are certainly following it with keen interest. And those are some of the things that we would like to factor in if we convince that it will work for our application to factor into the work that we want to do in the bulk mining method. But so far, Bill, I haven't seen anything revolutionary that is -- that we can confidently say this is a proven way, we would like to go ahead. But it's a good point you raise. We will certainly keep our eyes on that. Thanks, Bill. Well, there's one more question over there.

Unknown Attendee

Given that you're anticipating an expansion maybe greater than 60% eventually, is there sufficient smelting capacity available? And is the market almost infinite from your production viewpoint?

Philippus F. Du Toit

If you look at the palladium market today, it's probably in the region of 7 million ounces a year. Our production is between 100,000 and 200,000, so we can take quite a bit of an expansion, and we will not affect the market. From a smelting capability, if you look at the way that Vale and Xstrata or Glen Xstrata, Glencore now would like to move ahead, there certainly is smelting spouting capacity. And the question that we need to ask ourself, is that the long-term route we want to take in larger volumes? Do we want to take it to a third-party smelter, or do we think of doing maybe some primary separation ourselves? So that's all in the mix at the moment for the long-term planning. But short answer to your question, for what we're thinking in the near-medium term, smelting capacity is there, and we will not upset the market.

Well, I think there are no more questions. Then on behalf of NAP, I would just like to thank everyone here that joined us here today, truly a celebration day for us. And we're very pleased to say that our shaft has started working. So ladies and gents, thank you very much, and there will be a couple of press releases coming end of December, as you heard from Dave, and, of course, January, our guidance. Thank you very much, everyone. Thanks to the team.

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