North American Palladium's (PAL) CEO Philippus Du Toit on Q1 2014 Results - Earnings Call Transcript

May. 6.14 | About: North American (PAL)

North American Palladium, Ltd (NYSEMKT:PAL)

Q1 2014 Earnings Conference Call

May 01, 2014 08:30 AM ET

Executives

John Vincic - IR

Philippus Du Toit - President and CEO

Jim Gallagher - COO

Dave Peck - Head of Exploration

Dave Langille- CFO

Analysts

Alex Terentiew - Raymond James

Andrew Mikitchook - Edgecrest Capital

Alex Terentiew - Raymond James

Ernie Mullish - P&G

James Hader - Rossport

Operator

Good morning, ladies and gentlemen, welcome to the North American Palladium's First Quarter Results Conference Call and Webcast being held on Thursday, May 1, 2014, at 8:30 a.m. Eastern Time.

I would now like to turn the call over to John Vincic, Investor Relations Advisor. Please go ahead, John.

John Vincic

Thank you, operator. Good morning, everyone, and welcome to North American Palladium's 2014 First Quarter Results Conference Call and Webcast. The company's financial results were issued earlier this morning and are available on our website at nap.com.

Before we get started, please be advised that the information discussed today is current as of April 30, 2014, unless 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 tons are in metric tons.

Our presenters today are Phil Du Toit, NAP's President and Chief Executive Officer; Dave Langille, Chief Financial Officer; Jim Gallagher, Chief Operating Officer and Dave Peck, Head of Exploration. 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 Du Toit

Thank you John, and thank you all for joining us on the call this morning, one of our overarching objectives in late 2013 was to instill stability and predictability to our operations at our mines. To achieve that goal we added muscle to our operating team and set about establishing targets to ramp up our operation in a structured and measurable manner. The results of these efforts are beginning to bear fruit as can be seen from our first quarter results.

Progress across all of our key operating metrics is reflected through the benchmarks we have set against our full year guidance for 2014. Our underground production rates, recoveries, palladium ounces were all in line or ahead of our full year guidance.

One of our priorities now is to focus on finalizing improvements in the underground ore handling system and Jim will talk a little bit more about that. In so doing we are confident we can drive additional increases in production rate in the coming quarters to meet our full year metrics.

During the quarter we also published a new life of mine plan in conjunction with an updated mineral reserve and resource statement. This provides us with a solid six year mine life with good operating cash flows without the need for major capital expenditures. We have also allocated additional funds to exploration drilling and have an expanded budget of $10 million to carry out the necessary work at depth, to conduct conversion and extension drilling below the 1,000 meter level in the lower parts of the (oxygen) [ph]. This work will help us to complete the necessary evaluations of the potential to deepen the shaft later on and increase production rate and contemplate life of mine extensions at our mine.

We also concluded the necessary financing to proceed with our operations as planned to underpin the production to ramp up period. I can say today with confidence that we’re moving in the right direction and with that let me turn over the call to Jim to go over our operating results. Jim?

Jim Gallagher

Thank you, Phil and good morning everyone. As Phil mentioned, the first quarter of 2014 marked a very good start to the year as we are meeting or are ahead of guidance on virtually all of our key operating metrics. This is a testament to the hard work and dedication to our team members on the LDI site and I want to recognize that.

And additionally it is a clear sign that the enhancements and key team members we introduced at the end of 2013 and early in this quarter are starting to gain traction and deliver results. Majority of the tons being produced from underground are now being skipped to surface rather than via truck haulage, the short term improvements to the ore handling system are in place and we have made changes to our stoke blasting that have improved fragmentation.

A final reengineering at the underground ore handling system is on track for implementation and start up in the third quarter of this year. Ultimately these operational improvements will help us to continue progressing towards our full year objective of producing 5000 tons per day.

Let me briefly recap some of the operating highlights from the first quarter. First quarter palladium production was just over 42,000 ounces which is in line with our full year guidance and actually almost 10% ahead of our ramp up schedule which was based on 3,000 tons per day in the first quarter which we slightly exceeded and rising to 5,000 tons per day in the fourth quarter.

Cash cost was $492 per ounce which is better than our full year guidance, this number would have been even lower if not been for the extremely difficult winter but all of North America experienced it and certainly we did up north which led to higher propane consumption at much higher prices than anticipated and also higher electricity cost during the quarter.

Our underground grades averaged approximately 5 grams per ton and the surface low-grades stockpiles which was blended at approximately 1:1 ratio averaged one gram per ton.

Mill recoveries continue a trend of steady improvement and we’re 84.5% for the first quarter. The mill improvements implemented late last year, as well as the higher head grades are yielding positive results and we are at levels in line with our full year guidance sooner than expected. We still have additional mill optimizations to implement namely the flash flotation cells that will be informed later this year and should yield additional improvements by the fourth quarter.

As mentioned earlier, we announced skipping the majority of our tons to surface. On a few days in April, I can report that we skip more than 4,000 to surface and we’re close to achieving a total of 5,000 tons per day from underground. This is encouraging, as we are seeing clear signs that we can ramp-up over the remainder of the year, up to a consistent run rate of 5,000 tons per day.

On the mine development front, we are also tracking ahead of our internal targets. We have been able to increase underground development advance rates by utilizing all LDI workforce and cutting down on use of external contractors. This has resulted in better progress and overall lower unit costs. This will set us slow -- set us up well for the portfolio and set us up for production in 2015.

Currently, we have more than three months of production or already broken in three different stopes with a further two months of drilled inventory ahead of that, these are very key positive leading indicators for future production in LDI.

Underground production which we stated averaged almost 5 grams per ton during the quarter, which is ahead of plan, these grades were partly a function of mine sequence where on the new A25 level we have gone into the highest grades stopes, first, but also because we are growing money primary stopes only [indiscernible] recoveries and therefore we are seeing less dilution than planned.

Over the course of the year this trend -- this will trend towards the average grade or slightly above our guidance for the year. So we remain confident in achieving our 2014 guidance on total palladiums ounces produced. Another positive point, we have been very fortunate in our ability to recently attract very strong talent into the company. And have filled all of our key positions.

At this point, I’d like to turn it over to Dave Peck, for a brief overview of the company’s exploration program for 2014. Dave.

Dave Peck

Thank you, Jim and good morning everyone. As so mentioned we’ve expanded our exploration budget to accelerate reserves drilling on the offset. Our drilling targets are shown on Slide 5. We started drilling in late March and are carefully monitoring results on a daily basis. We expect to complete 43,000 meters of drilling this year. We have also started extending our 655 mine level exploration drift, which will provide us with a very efficient underground drilling platform.

Our number one priority for this expanded program is to (approve up) [ph] high grade resources in the lower part of the offsets and deposit below the 1,000 meter level to support a detailed assessment of a potential mine expansion. And with the increase in our exploration budget from $4 million to $10 million we are now well positioned to do this.

Now I’ll turn the call over to Dave Langille to discuss the company’s financial results for the year. Dave

Dave Langille

Thank you, Dave, and good morning everyone. Before I get into discussion of our financial performance during what I believe was a solid first quarter for 2014, I’d like to take a moment to explain some matters that had an impact in our financial results. As noted in the MD&A and similar to other companies mining in Canada, we experienced a colder than normal winter at LDI, this led to higher cost for propane (than power and) plant [ph] resulting in about $2.7 million in additional expenses.

The impact of this additional cost, on cost per ton milled was about $5 Canadian and about $70 per ounce of palladium sold. In March 2014, repairs to primary surface crusher required us to split the planned mill run in the two segments resulting in the mill running until the final days of the month, which is not a typical practice. This led to a build-up of concentrate inventory at the end of the quarter, valued at about $5.2 million on a cost basis, resulting in a reduction recognized revenues. However, we expect these concentrate inventories to be recognized as revenue in the second quarter of 2014.

Now moving onto a summary of key financial performance for the first quarter. Revenue during the first quarter of 2014 was $48.7 compared to $47.1 million in the same period last year. In the first quarter of 2014, the company realized an average palladium price of $739 per ounce of palladium sold, which compared favourably to the same period last year.

This gave us a palladium operating margin of $247 per ounce or $10.5 million during the quarter. Net loss for the quarter was $26.7 million or $0.11 per share compared to a net loss of $2.8 million or $0.02 per share in the same period of 2013. The increase in the net loss is primarily due to the impact of the increase in certain non-cash items including $7.5 million of foreign exchanges losses, 4.3 million of increased depreciation and amortization and 16.6 million of increased accrued interest expense partially offset by $4 million decrease in exploration expenses.

EBITDA was $0.6 million compared to $2.9 million for the same period in 2013. Adjusted EBITDA which excludes interest expense and other costs, depreciation and amortization, exploration, foreign exchange losses and mine restoration cost net of insurance recoveries increased by 18% or $1.5 million to $9.8 million.

Turning to the balance sheet as of March 31, 2014 the company had cash and cash equivalents of $21.9 million compared to $9.8 million at December 31, 2013.

Subsequent to the year-end we completed a $35 million financing of 7.5% convertible unsecured subordinated debentures and associated warrants. On a pro forma basis reflecting the gross proceeds of the debentures the company’s cash position at March 31, 2014 was approximately $55 million.

The second tranche financing completed subsequent to the year at quarter end had similar terms to the first tranche raised in the first quarter, however there were some differences most notably the conversion price of the second tranche was $0.04629 per share and the exercise price of the second tranche warrants is $0.05786. The warrants will entitle the holders for purchase up to 25% of the number of common shares of NAP into which the principle amount is convertible at the initial conversion price at any time before the second anniversary of the date of issue.

I should point out the debenture holders have the option to convert their debentures into common shares at any time at a conversion rate of approximately 2,160 common shares per $1,000 debenture. Holders converting their second tranche debentures will receive all accrued and unpaid interest as well as interest due to the maturity.

As of yesterday approximately $27.4 million of the 35 million debentures have already been converted into approximately 88.1 million common shares with more conversions likely to follow.

In summary we required additional liquidity and financial flexibility to carry out our capital and exploration programs through to the end of the year. We are very pleased by the positive operating results we are seeing across the metrics of our business and we hope to continue this momentum into the second quarter and throughout the remainder of the year.

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

Philippus Du Toit

Thank you, Dave. Let me conclude by spending a moment discussing some of the positive trends in our business. As you can see all of our key operating metrics are trending in the right direction. Operation stability and predictability is our target to achieve 2014 guidance. However, much work still needs to be done but we have laid the foundation and begun (boarding) [ph] a culture that can help us build a track record of delivering consistent operating results.

The four objectives that underpin our strategy remain intact and let me close by providing an update on each of these. First, we are making progress as planned towards increasing our underground production so we can reach steady state of production of up to 5,000 tons per day by year end. Second, our objective to optimize performance at the mine and mill complex continues and the results includes outputs and costs savings are clear. Third, we continue to consider future growth opportunity so that we can increase utilization of the shaft and remote. The updated life of mine plan and updated reserve and resource statement published during the quarter gave us a clear roadmap in meeting this objective. Our expanded exploration budget and on-going work will help us with the studies for evaluating the life of mining expense and opportunities.

And finally, we’ll continues to address the balance sheet constraints during the quarter and subsequent to quarter we completed financings that give us the stability and flexibility required to move our business forward. Longer term we recognize the need to address the capital structure and debt burden and on top of all this the fundamentals for the palladium in the medium term looks very strong as it clearly appears as the demand will exceed supply.

In closing, I want to thank our entire team at LDI and the corporate office for their dedication and commitment to helping us become a low cost palladium producer. I also want to thank our shareholders for their continued patience and support.

So with that thank you very much for your participation and now we look forward to answering some of your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Alex Terentiew from Raymond James. Please go ahead.

Alex Terentiew - Raymond James

Good morning guys. I just have a few questions here, the first one I see you have expanded your exploration budget by $6 million. Are you comfortable you have enough cash resources to get you through the next one-two years and including capital going out to 2015? And if not is the additional exploration something you view as necessary to do in the near term to attain your production targets?

Philippus Du Toit

Alex, thank you. Let me first say that we have adequate cash on hand to take us through '14 and into '15. And we don’t need any further capital injection to support the exploration program that really came from the financing that's concluded. I hope I've answered the question.

Operator

Our next question comes from Andrew Mikitchook - Edgecrest Capital, please go ahead.

Andrew Mikitchook - Edgecrest Capital

Hello gentlemen, congratulations on a good quarter. I don’t know Phil or Jim, maybe one of you could give us some guidance on how the substantial or the remaining majority of $300 million -- $30 million CapEx, I apologize, for the balance of the year would be spent. Is that more or less even or should we expect some lumpiness in that?

Philippus Du Toit

Andrew, good morning. Thanks for the question. I'm going to hand you over to Jim. Jim can take us through the capital profile?

Jim Gallagher

The major items on capital I think are -- remain consistent from our plan at the end of last year when we established the budget. We have a substantial portion goes into the underground lateral development, capitalized development as we extend the mine deeper, that’s a normal business activity that’s ball parking here without the numbers in front of me, $8 million or $9 million this year. We have some work to do, the mentioned mill project which is going to be under $2 million. We have standard equipment replacement, both are surface fleet and our underground fleet will be upgraded, both some on-going maintenance and some [indiscernible] replacements and some outright replacements of some equipment. And just thinking the other major items, of course we mentioned the ore handling system and we have 1.7 million budgeted for that. So they're kind of standard sustaining items, a little bit [indiscernible] management facilities and things of that nature.

Andrew Mikitchook - Edgecrest Capital

Okay, so nothing lumpy. It's not like you have to send somebody $10 million check tomorrow?

Jim Gallagher

No.

Andrew Mikitchook - Edgecrest Capital

Okay. And then maybe a second follow up question this time for Dave. What is the kind of a run rate reasonable, I guess accounts payable and account receivable numbers that this should normalize to? Is the types of numbers that came out on March 31 something resembling a run rate for the way PDL operates this business or should there be some kind of flattening of those numbers to some degree?

Dave Langille

So on the payable side it's probably ranging between 25 million to 30 million, it's not an unreasonable number where we're not pursuing a big capital spend program. So I think we're 29 million at the end of the quarter which is in range for that on the payable side. On the receivable side that'll obviously depend on the ramp up. The number of at quarter end was I think high and will continue to increase. We have alternatives available to do that, obviously that opens up a different more room at our credit facility as those receivable numbers get larger. But I think 48 million, 49 million where we're right at the quarter. I'd expect to see that probably exceeding 60 by the end of the year. But again we may take action to bring that down and accelerate our cash flow, we have ability to take advance cash payments from us smelters and take other action as required as we elect.

Andrew Mikitchook - Edgecrest Capital

Just where I'm kind of taking this question is that -- if we kind of take the cash position you had at the end of the quarter, plus the financing may be less some amounts kind of straight lined for CapEx? Is that a reasonable way to think about how to forecast cash balances -- say at the end of next quarter?

Dave Langille

Yes, I think that’s not unreasonable. I guess the big swing thing that we’re looking at right now is the price of palladiums running at 810, 813, this morning 817 so it’s a [indiscernible] U.S. dollar basis that puts us at 891 plus Canadian, so depends what revenue assumption you make on the receivable size.

Operator

Our next question is a follow up from Alex Terentiew from Raymond James. Please go ahead.

Alex Terentiew - Raymond James

Hi, guys. I just have about two more questions here actually please. First question just on the ramp up paid underground, I know you’re seeing some data for 4,000, it’s just, is that the number -- are you referring just to the ore being brought up? Or is there some waste being brought up with that number as well?

Jim Gallagher

That’s specifically an ore number. Right now all of the waste generated is put back into the stopes underground, so we aren’t wasting any waste at all at this point in time and really don’t plan to. So that is underground ore production.

Alex Terentiew - Raymond James

Okay, great. And just a follow-up to that one. Is getting to 5,000 tons per day, is the bottleneck really, I mean does it have anything to do with operating of the shaft itself or is it just eventually slowly ramping up the debottlenecking the underground constraints themselves and getting more ore to the shaft?

Jim Gallagher

It’s the whole system, and the development has to be advanced, you have to have the drilling, the blasting, enough stopes in production. And you can’t have a bottleneck in the shaft. So those are all things that we’re progressing on and feel confident we’ll have in place by the end of the fourth quarter.

Alex Terentiew - Raymond James

Okay thank you, last question, with the run up in palladium prices or the constant rise we’ve been seeing over the past few months. Are you seeing any opportunity to get better terms or do you have the ability to negotiate better terms for your off take agreements? I've just heard from a few other developers in the region that smelters are more eager to secure off take from some projects out there.

Dave Langille

So, I’ll answer that Alex, its Dave here. I think the answer to that is yes, there’s certainly a lot of interest we’re getting inbound calls, certainly people are interested in the end product and they are interested in the field, so part of our -- one of our things in our plan for this year is to sort of canvass the market on a global scale to find out what alternatives we have available to us in terms of treating our concentrate in the future, so it’s something that we’re looking at very carefully because a lot of cost ends up with those smelters and there’s a lot of additional bottom-line cash flow to generate by and negotiating better terms so we’re certainly looking at that closely.

Operator

Our next question comes from Ernie Mullish from P&G.

Ernie Mullish - P&G

Yes, how’re you doing, congratulations on a great quarter? I noticed on the financial statement that you’re starting to expense your interest payments, is that going to be an item that we’re going to see on the financials every quarter about 17 million or what’s the run rate on that.

Dave Langille

Yes, for accounting purposes since we finished the capitalization phase of the ramp up last quarter, at the end of the fourth quarter I should say, of last year, we are capitalizing most of the interest associated with the senior secured loan and a portion of the credit facility so on a go forward basis we will be expensing that in the future, so that’s what you’re seeing in the first quarter and that calculation is just based on the balance outstanding and the interest rate, so it’s in the neighborhood of what you saw in the first quarter and subject to what we do in terms of paying down the credit facility with the funds we received recently.

Ernie Mullish - P&G

Okay thank you and then on your underground production, I noticed that you produced about twice as much nickel and copper as I was expecting for your 43-101, are you getting a higher grade underground of your base metals or is that better recovery for both.

Jim Gallagher

I think partially a little bit better recovery which comes with the higher mill head grade but no I don’t think there’s anything abnormal in our byproduct credit production at this stage.

Ernie Mullish - P&G

And then another question is on the ore handling system, what’s the capacity of the shaft? And when do you expect to get to 100% of full capacity?

Jim Gallagher

While the ultimate capacity of the shaft quite frankly is over designed for our current needs but not potentially for future needs, so we'll verify that capacity to be about 8000 ton a day, but with the current set up and the current mine plan, we are maximizing that at 5000 tons per day. So that’s our planned production rate in the life of mine plan as well.

Ernie Mullish - P&G

I see. And one more question, do you have a number for all-in sustaining cost per ounce of palladium?

Dave Langille

We haven’t that calculation; we were looking at the operations because it's so recent, since switched from the capitalization phase we haven’t looked at all in number, so I do not have it for you at this point. I can certainly get that to you offline, we can take a look at the calculation if you wish, you can contact me after the call.

Operator

(Operator Instructions) Our next question comes from James Hader - Rossport. Please go ahead.

James Hader - Rossport

Hi, guys. Just on the recoveries how sustainable is the 84.5% and was there anything different in the ore -- I know the grade was obviously higher, but was there anything different in the order that made it more amenable for the recoveries this quarter. On a similar vein, can we sort of run with the 5 grams per ton grade that you’ve got it in Q1, is that sustainable in Q2 and Q3 or will we see it drop off there. Thank you.

Jim Gallagher

So on the mill recoveries, yes, the mill recoveries are sustainable, those are a result of both a higher head grade which will continue to increase as we increase the underground production and the various improvements that have been made in the mill over the last couple of quarters. And as mentioned, we will be making further process improvements later this year, so our guidance was above the 85% and we’re quite confident we'll meet and perhaps even exceed that with the progress that we have.

On the grade question, no, 5 will not be sustainable, but that is higher than guidance. Later this year we will start running some of the secondary stopes, we will have more dilution. So as mentioned, we will trend back to the average which will be our guidance above 4 grams.

Operator

At this time we have no further questions. I'd like to turn it back to the presenters for closing remarks.

Philippus Du Toit

Thank you very much. And thank you very much for everybody participating today, and with that I conclude the call.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!