North American Palladium Management Discusses Q4 2013 Results - Earnings Call Transcript

| About: North American (PAL)

North American Palladium (NYSEMKT:PAL)

2013 Earnings Call

February 20, 2014 8:30 am ET

Executives

Camilla Bartosiewicz - Director of Investor Relations & Corporate Communications

Philippus F. Du Toit - Chief Executive Officer and President

James E. Gallagher - Chief Operating Officer

David Carlo Langille - Chief Financial Officer

Analysts

Alex Terentiew - Raymond James Ltd., Research Division

James Hayter

Matthew O'Keefe - Mackie Research Capital Corporation, Research Division

Operator

Good morning, ladies and gentlemen, and welcome to North American Palladium's Fourth Quarter and Year-End 2013 Results Conference Call and Webcast being held on Thursday, February 20, 2014, at 8:30 a.m. Eastern Time.

I would now like to turn the call over to Camilla Bartosiewicz, Director, Investor Relations and Corporate Communications. Please go ahead, Camilla.

Camilla Bartosiewicz

Thank you, Dawn. Good morning, everyone, and welcome to NAP's 2013 Results Conference Call and Webcast. The company's financial results were issued earlier this morning and they're available on our website at nap.com.

Before we get started, please be advised that the information discussed today is current as of February 19, 2013, and as otherwise indicated, and that comments made on today's call may contain forward-looking information. This information, by its nature, is subject to risks and uncertainties and, as such, actual results may differ materially from the views and expectations expressed today.

For further information on these forward-looking statements, please consult the company's relevant filings on SEDAR and with the U.S. Securities and Exchange Commission.

Also, please be reminded that all currency amounts discussed on today's call are in Canadian dollars, unless otherwise stated. All references to production in ounces refer to payable production and all tonnes are in metric tonnes.

Our presenters today are Phil Du Toit, NAP's President and Chief Executive Officer; Dave Langille, Chief Financial Officer; and Jim Gallagher, Chief Operating Officer. When the prepared remarks conclude, we'll be pleased to take questions from analysts and institutional investors.

And now I'd like to turn the call over to Phil.

Philippus F. Du Toit

Thank you, Camilla, and thank you, all for joining us on the call this morning. As you will hear today, our 2013 operating and financial results, are indicative of the transitional phase we were in; a year with its share of successes and achievements, as well as challenges and some disappointments.

In summary, 2013 was a year during which we strived to balance implementing operating improvements and completing a major development project, while at the same time rebuilding our team, accessing a new deeper mining zone and identifying the future growth potential. Furthermore, we had a financial shortfall during a period when sector challenges made capital a scarce and expensive commodity.

Be that as it may, we finished the year on target with our revised production forecast. We completed the construction of the shaft, and commenced commissioning. We successfully recruited top talent for key positions, and through our exploration efforts, we gained a better understanding of the ore body, which led to mine planning improvements. We made progress in our review of future growth prospects, and we started to notice some improvement in our operating trends, and areas of cost control, more recoveries and project planning.

The growing pains that we've been through the past year are not out of the ordinary, and that's in the case with change, the benefits only become apparent over time. Most importantly, the drawbacks gave us valuable insight in future risk mitigation and opportunities for improvement.

Although still early in the year, I am pleased to report that operations are off to a very good start so far in 2014, surpassing some of our internal forecasts and underpinning our confidence in our assets. We remained encouraged by the momentum of our new team at site and the potential that can still be realized through our ongoing cost-optimization initiatives and improved mine planning. At present, we also remain focused on improving the balance sheet, an endeavor that is closely tied to improving our mining operations and enhance operating cash flow.

With that as a back drop to the year, I now would like to turn the call over to Jim to go through our operating results. Jim?

James E. Gallagher

Thank you, Phil, and good morning, everyone. As Phil mentioned, 2013 was an eventful year during which our operating focus remained on the safe and timely completion of the shaft project, as well as implementing numerous initiatives aimed at improving our cost controls, our planning and scheduling and our overall operating performance.

It was also a year during which we accessed the new Offset Zone, we revamped our site management team, and we significantly reduced our reliance on contractors. Most notably, I would like to mention the reduction in development contractors for our underground mine development. We've taken that task over ourselves with our own workforce, have currently matched in January the performance of the contractors and are doing it at a significantly reduced cost.

To briefly recap, LDI's operating results in 2013, our annual palladium production was just over 135,000 ounces, which was in line with our revised forecast for the year. The cash cost of $560 per ounce was higher than forecast, impacted by a number of factors, including: Lower production volumes, resulting from the transition into the new ore body; limitations on the ore handling system, which still require some haulage up the ramp through the course of the year; and decreased metal prices for our byproducts.

During the year, we augmented underground Offset Zone ore with lower-grade surface stockpiles, which resulted in an overall lower head grade of 2.8 grams per tonne. Our underground grades, however, averaged 4.4 grams per tonne, and the surface ore averaged a combined grade of 1.6 grams per tonne coming from some early open pit material and from the various low-grade stockpiles.

Despite the variability in mill feed throughout the year, our mill recoveries held up quite well, improving slightly in quarter 4 and averaging 80.7% for the year. In fact, our January update stated we achieved 84% recovery in the mill, reflecting improvements made in December with the upgrades to our VERTIMILL and improvements in the grinding circuit.

As Phil mentioned, operations are off to a good start so far, giving us encouragement for the year ahead. The production ramp-up from the Offset Zone utilizing the shaft is progressing well. In January, 2014, underground production was 30 -- just over 3,100 tonnes per day, which is ahead of our guidance of 3,000 tonnes per day for the first half of the year. This led to an excellent payable production for January of 15,200 ounces of palladium, representing one of the best months since we reopened the mine in 2010.

As I mentioned, we're also realizing positive mill recoveries of around 84%; this, coming from a blended mill feed and with a head grade of approximately 3.4 grams per tonne. Underground production, again, in January averaged 4.9 grams per tonne, slightly ahead of forecast. Our work to optimize design that the underground ore handling system is on track. We have currently implemented some short-term solutions, and will have a redesign implemented by the end of the second quarter this year. This change really involves improving the sizing of the grizzly and the shoots which feed the crusher which are currently the restriction.

Now, I'll return the call over to Dave to discuss the financial results.

David Carlo Langille

Thank you, Jim, and good morning, everyone. I'll start off by recapping our annual financial performance during 2013 in comparison to 2012. It should be noted that the results are only from the palladium operations, which exclude the gold division which we sold in March 2013, and was therefore treated as a discontinued operation.

I'll also note that our financial performance during 2013 was indicative of the transition period that we are in, which compared to 2012 results, resulting in decreased mining volumes, reduced head grades and higher operating costs.

Revenue was a $153.2 million, compared to $160.7 million. The 5% year-over-year decrease in revenue was primarily due to a decrease in sales volumes, partially offset by higher realized palladium prices.

In 2013, the company realized an averaged palladium price of USD 724 per ounce of palladium sold, which compared favorably to the 2012 number of realized palladium price, averaging approximately USD 640 per ounce. That gave us a palladium on operating margin of USD 164 per ounce, or USD 22.2 million in 2013.

The net loss was $46.2 million or $0.25 per share, compared to a net loss of $66 million or $0.39 per share, in 2012. 2013 included a number of unusual items or nonrecurring. We had loss on debt restructuring of approximately $11 million; a foreign exchange loss for noncash of $7.4 million; loss of investments related to the gold sale of $2.3 million; some financing costs, $3.7 million; and additionally, depreciation and amortization increased $6 million due to our larger capital base.

EBITDA was negative $5.6 million, compared to positive $9.4 million in 2012. Adjusted EBITDA in 2013, which excludes interest expense and other costs, depreciation and amortization, exploration and mine restoration costs net of insurance recoveries, was $13.4 million, compared to $28 million even.

Looking at our capital spend during the year, NAP invested $109.5 million in development and capital expenditures at LDI, excluding $28.6 million of capitalized interest. Of the $109.5 million investment, $91.8 million was spent on the LDI mine expansion and $17.7 million was spent on other sustaining capital expenditures at LDI, including a $16.1 million investment in the tailings management facility lift.

NAP's total expenditures in exploration and infill drilling amounted to $12.3 million, excluding $1.6 million that was capitalized in connection with the LDI mine expansion. We expect to release our annual estimate of mineral reserves and resources in Q1 this year. The 2014 exploration program will target the lower portion of the Offset Zone, in support of an anticipated PEA study we plan to commence late in 2014.

Turning to the balance sheet, December 31, 2013, the company had cash and cash equivalents of $9.8 million. Our USD 60 million credit facility is limited by borrowing base calculation, and was fully utilized at year-end at a level of USD 31.2 million. The transition into the Offset Zone and the commissioning of the shaft put us in a liquidity squeeze and contributed to our need to secure additional financing. Subsequent to the year-end, we completed a $32 million, 7.5% convertible unsecured subordinate debenture financing. On a pro forma basis, reflecting the gross proceeds of the debentures, the company year-end cash position would have been $41.8 million.

To recap the financing, the debentures mature on January 31, 2019 and bear interest at a annual rate of 7.5%. The conversion price is $0.635 per share, and the exercise price of the warrants, if approved by shareholders, is $0.762 per share. Subject to disinterested shareholder approval, the warrants will entitle the holders to purchase up to 33.33% of the number of common shares of NAP into which the principal amount is convertible at an initial fixed conversion price, at any time that is 3 years before the date of shareholder approval.

The debenture holders have the option to convert their debentures into common shares at any time, at a conversion rate of approximately 1,575 common shares per $1,000 debenture. Upon conversion, holders of the convertible debentures are entitled to all accrued and unpaid interest, as well as interest calculated through to the maturity date. In less than 3 weeks since they were issued, approximately $20 million of the $32 million debentures had been converted into approximately 47 million common shares, with more conversions likely to follow. We believe these conversions have accounted for some of the recent volatility and downward pressure in our share price.

As stated in our January 12, 2014 news release, we are looking to raise up to $43 million in additional financing. The actual amount required to meet our 2014 needs will largely be dependent on how our operations perform, and we are encouraged by the progress made to date.

I'll now turn the call back to Phil for some closing remarks. Phil?

Philippus F. Du Toit

Thank you, Dave. Before we open up the call for questions, I want to summarize the operating and strategic initiatives that we're working on for this year.

As was mentioned previously in our AGM in May of 2013, 2013 was really marked as a transition year for us with its related challenges. 2014 will be a year to make it work, as well as plan for the expansion laterally, as well as in-depth. And we are on track.

So, in no particular order, our first strategic objective is to capitalize on the new shaft infrastructure and increase our underground production. Recall that our target is to increase from 3,000 tonnes per day up to 5,000 tonnes per day by year-end. This is a critical objective that will be instrumental in reducing operating cost and therefore improving bottom line financials. And I'm pleased to say, we are on track.

Our second strategic objective is to continue with our optimization programs, aimed at improving operating performance at our mine and mill complex so that we can realize additional cost savings. There is room for improvement and I'm encouraged by the progress made to date against this initiative. For example, we're striving for a 3% to 5% improvement in mill recoveries, which, in the month of January, already showed an improvement over 2013 from 80% to 84%. Again, we are well on track.

Our third strategic objective is to identify future growth opportunities so that we can increase the utilization of the shaft and the mill complex. As you know, during the year, we plan to complete a PEA study to evaluate opportunities for future growth by investigating the economies of expanding at depth, employing a higher-volume mining method and looking at other sources of ore. And, again, we are well on track with this initiative.

Another strategic objective is to address the balance sheet constraints. In the near term, we are working on addressing the funding shortfall, and the longer term, we will address the debt burden with more visibility on how NAP will return to sustainable long-term profitability.

In closing, I want to reiterate that we are dedicated to building long-term shareholder value by realizing our vision of becoming a low-cost palladium producer. We are appreciative of the shareholders who continue to stand by us and sincerely value your patience as we turn the operations around.

The fundamentals of the business such as commodity, ore body, technology, technical talent, growth prospects remain very strong, giving us encouragement that as we execute on our strategy, shareholder value creation will follow.

Once again, thank you for your participation, and now we look forward to answering your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Alex Terentiew, Raymond James.

Alex Terentiew - Raymond James Ltd., Research Division

It's Alex Terentiew. Do you have any color you can provide us yet on cost guidance for 2014? You've given us some production targets, but anything on cost you can give us?

Philippus F. Du Toit

Dave, shall you handle that for us?

David Carlo Langille

I guess, Alex, we just are keeping with the guidance we have out in terms of the 2014 guidance. We haven't updated anything since then and haven't provided anything in the public domain at this point. But if it helps, we now have a quarter underneath our belt for the first quarter, but bear with me I'm just going to see, show the trends going forward.

Alex Terentiew - Raymond James Ltd., Research Division

Yes, sure. That makes sense. Second question, do you expect the rest of -- I saw that the $20 million of the $32 million of first tranche convertibles converted to common shares. Do you expect the rest of those convert holders to do the same and exercises their make-whole provisions that they have there?

David Carlo Langille

Based on the trend we're seeing, I think it's going to be fairly rapidly converted. I, personally, would not be surprised to see that they'd fully converted by the end of Q1.

Alex Terentiew - Raymond James Ltd., Research Division

Okay. And that, I believe you guys did an additional I think, it was $4.2 million or $4.5 million upsizing it, those are -- that's in addition to that $32 million and they have the same provisions, I would assume then, correct?

David Carlo Langille

No, that's not correct. The $32 million was inclusive of the $4.5 million. So we just did phasing of the capital.

Alex Terentiew - Raymond James Ltd., Research Division

Okay, okay. Another question. You mentioned a couple of weeks ago that in 2015, you may need to raise additional capital to extend deep in the shaft. Is your ability to operate at least operate profitability in, say, 2015 and '16 dependent on securing this financing and proceeding down that path? And if not, can you not delay the shaft deepening for a few more years beyond that?

David Carlo Langille

Now, it's an excellent question, so the answer is we alluded to the 2015, we have a 43-101 that we're planning on filing in the first quarter. That will give updated reserve and resource information and we are looking at a more robust status quo plan right now, using the existing infrastructure. So you're right, I mean, certainly the goal is to delay that capital spending until we've certainly got the preliminary economic assessment done and done a full pre-feasibility or feasibility study just to be very prudent in that capital spend in the future. So, to the extent that we can continue operations and extend a incurrence of that capital expenditure, we certainly are looking to do that. Jim and Phil, I'm not sure if you have any other comments you'd like to add?

Philippus F. Du Toit

Jim?

James E. Gallagher

Yes, I'd just like to add, our focus this year is going to -- from an exploration point of view, will be better defining the ore body at depth. We have great confidence that the ore body extends the depth that simply has not been drilled adequately. When that information is available, we're going to roll that into a PEA, which we've already talked about, which we should complete before the end of year and that really will help define the path forward, when we would need to start Phase II. So really, until that exercise is complete, we can't really forecast directly when that capital spend needs to happen.

Operator

Our next question comes from James Hayter from Rossport Investments.

James Hayter

Similar question to Alex really; on the trade-off between deepening the shaft and extending laterally in the Offset Zone, will that come out in the PEA or do you guys have a sense now that in order to get beyond, say, 5,000, 6,000 tonnes per day, you really need to deepen the shaft sooner rather than later?

Philippus F. Du Toit

I will refer that question to Jim, but in summary, very quickly, as mentioned earlier, the 43-101 will come out in March, the revised 43-101, which has started to recognize some of the lateral opportunities, extending the life of Phase I. And, as far as the timing of Phase II is concerned, it's very much, as Jim has indicated, is that once we have finished the PEA and the scoping and the feasibility study, that will tell us the right time when to expand that. Jim, I don't know if you want to add anything more to that?

James E. Gallagher

Yes, I think the assumption is correct. We have a good base case operating plan that will take us to 20-21 and that'll be in better detail than the upcoming 43-101. That does not require the deepening of the shaft. Deepening of the shaft will allow us to hit the full potential of the LDI asset. And the timing and the actual production rate, there certainly is upside from what we'd be able to do now, but as I say, I think we need to complete those studies, complete the drilling, in order to really nail down those numbers.

James Hayter

But just conceptually, there is upside from going laterally from the sort of 5,000 tonnes per day run rate. I mean, I know it's early days but conceptually, there is upside to that 5,000 tonnes per day, if you decided to postpone deepening the shaft?

James E. Gallagher

Yes, there's some upside. But the real opportunity long term comes from deepening the shaft to upside that production profile.

James Hayter

Okay, understood. And just any idea of the exploration budget for this year?

Philippus F. Du Toit

Yes, the exploration budget, as we have it right now, is in the region of about $4 million, focusing on definition drilling. We also, with the second tranche of the financing, want to increase that, with about a further $6 million, so that we have the, as Jim and Dave mentioned, the deepening of the Offset Zone drilled off, so that we can start to do the economic assessment of the shaft deepening. So the intention is to increase our drilling program for this year.

James Hayter

Okay, so assuming Tranche 2 gets done, we're looking at about $10 million for exploration?

James E. Gallagher

Total. Yes, yes. That's the order of magnitude. And the bulk of that will go towards the deeper drilling of the Offset Zone.

Operator

Our next question comes from Matthew O'Keefe from Mackie Research Capital.

Matthew O'Keefe - Mackie Research Capital Corporation, Research Division

Thanks for the additional clarity on the longer-term potential here. I think we all realize there's great potential for Lac des Isles longer-term, but focusing a little bit more on the short term or in the immediate future, when you mentioned that you're still targeting a $43 million additional financing, we don't know what the big -- what the sort of requirement amount is. What is the required amount, assuming you meet your current targets, which is around 180,000 ounces, and $530 an ounce. What kind of -- I mean, are we -- because you're flat on working capital right now, adjusted working capital. So I mean how are we going to look through -- is there a minimum requirement that's needed at this point?

David Carlo Langille

The minimum requirement depends on the operating results. As I say, January is encouraging, February is looking encouraging. But to answer your question, based on the plan that we use internally, in terms of our guidance, we're saying $20 million plus or minus is the requirement. $20 million would probably get us to the additional exploration spending that Phil was interested in. And then we're talking about in terms of drilling off the Offset Zone, and the number would be lower than that to the extent we pulled in our horns and strictly stuck to a $4 million exploration program and stuck to a more constrained capital expenditure program.

Matthew O'Keefe - Mackie Research Capital Corporation, Research Division

Okay. Well that's good. Well if things keep going well, it looks like it'll be less of an issue. That's great. And then, just another question, if -- just to dig down a little bit on the limitations you've been experiencing in your ore handling systems. I know you mentioned you were going to do some work on is it replacing the grizzly reserve? Could you just go onto a little detail for me to help me understand sort of what the issue is, and why it is?

James E. Gallagher

All right. Fair question. I just want to reiterate that the shaft is operating well. The crusher, which we talked about in November, had a few initial commissioning issues; those are no longer an issue. So we have a great system there. The grizzly and the shoots that feed down into the crusher, so the grizzly is on the 645 level, these, quite frankly, are undersized and until they were built and commissioned in November of last year, really didn't become apparent on what had happened there. We have a big black hole mine and as one of our operators described it, we have a small gold mine ore handling system in terms of the grizzly, and that's the best way to describe it. So it isn't a matter of just changing the grizzly because it'll cause choke points below. So we have to fix the system in unison as it feeds down into the crusher. Some of that is short-term fixes or tweaking the sizing a little bit, which we've done. But we are going to have to reconstruct a part of that. We are in process redesigning that at this moment. We expect to be able to implement that design change in -- probably, in the summer. We anticipate about a one-week shutdown of just the ore handling system, but we have to keep the ability to continue trucking up the ramp. We have some stopes in the upper part of the mine that we're holding back until that happens. And we do have the waste system, which we are actually running ore through. So we have some mitigations, but we don't expect that we're going to a see significant impact at all, while we reconfigure the ore handling system.

Philippus F. Du Toit

And maybe [indiscernible]. It's also worth just adding that the modifications is costed out and it's already allowed for in our capital expenditure plan for 2014.

Matthew O'Keefe - Mackie Research Capital Corporation, Research Division

Great. So it's a relatively small cost and more of a timing issue; is that a correct assumption?

James E. Gallagher

Yes, it's approximately $1.7 million, it's the estimate we currently have to the work and it will be the timing. Until we can get it done, we are still, today, plus or minus 50% of the tonnes still go up the ramp, as opposed to going up the shaft.

Operator

[Operator Instructions] We have no further questions at this time. I will now turn the call over to Phil Du Toit for closing remarks.

Camilla Bartosiewicz

Okay. All right. Thank you, operator, and thank you, everyone, for participating. If we missed anyone, please get in touch with me at camilla@nap.com. Thank you, and have a good day.

Philippus F. Du Toit

Thank you, everyone.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.

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