North American Palladium: Debt Analysis And Cash Cost After The Interest Change To The BAM Loan

| About: North American (PAL)


PAL today repaid $16.2 million in interest to BAM at a cost of $7.2 million. However, the interest is now down to 15% from previously 19%.

Is it making any financial sense to spend $23.4 million in cash for PAL now?

This move seems illogical and will probably force PAL to use another equity financing before the end of 2014.

North American Palladium (NYSEMKT:PAL) has repaid today $16.2 million in interest to BAM and paid a pre-payment fee of $7.2 million. It is a substantial change that will reduce interest to 15% starting September 30. Let's discuss these three important topics:

1 - What is the total debt as of July 2014, including options and warrants?

2 - What is the real all-cash cost?

3 - Commentary about the interest payment to BAM.

1 - What is the debt after the last payment on July 2014.

1 - The bulk of the money owed comes from the Brookfield's [BAM] loan (06/07/2013) and it is a huge cost. The amount due is now $173.2 million at an interest going down from 19% back to 15%. The company repaid $16.2 million and had to pay the "prepayment fee" based on the covenants. Here is the basic calculation:

Prepayment fee = 16.2 x 0.15 x (July 2014/July 2017) /365 = $7.2 million.

Yes, PAL was charged $7.2 million to be able to repay $16.2 million and reduce the interest from 19% to 15%. The company will have to pay interest quarterly to BAM in order to keep the debt amount unchanged at 15%. Is it really worth it?

Here is an excerpt of the last press release:

The outstanding balance under the senior secured term loan is approximately US$173.2 million on July 1, 2014.

2 - C43M ($40.33 million) in debenture at 6.15% due September 2017.

3 - $36.4 million of a $60 million operating line of credit due July 4, 2014. From the 6K filing Q1 2014, results:

The Company has, subject to a borrowing base cap, a US$60.0 million credit facility that is secured by certain of the Company's accounts receivables and inventory and may be used for working capital liquidity and general corporate purposes and is due July 4, 2014. As of March 31, 2014, the borrowing base calculation limited the credit facility to a maximum of US$38.6 million of which US$36.4 million was utilized. The Bank of Nova Scotia extends the LOC by an additional year on the same terms and conditions, which includes US$ based loans interest at LIBOR plus 4.5%, to July 3, 2015.

A quick calculation gives an interest at approximately 5.2%

4 - $17.32 million in operating leases and finance leases (I presume at 10%?) Finance lease obligations $11.646 million, Operating leases $4.137 million and Purchase obligations $1.534 million. These numbers are from the last 6K. In addition, from the 6K:

5 - $27.44 million in asset retirement obligations and letter of credit as financial surety for future outlays.

...the Company also has asset retirement obligations at March 31, 2014 in the amount of $14.6 million for the LDI Mine. The Company also has contractual obligations reflected in accounts payable and has obligations related to its credit facility and long-term debt. The Company obtained letters of credit of $14.4 million as financial surety for these future outlays.

6 - $6 million estimated, left from the two convertible debentures at 7.5% due January 2019. The total cash was around $70 million in two separate offerings in Q1 and Q2 2014. Most of the amount has been converted to shares, and the full interest was paid immediately. Shares Outstanding after the conversion was 362,800,866 shares, however, it will be close to 400 million shares and a huge amount of warrants at around $0.547.

As of April 30, 2014, $31.7 million and $27.4 million of the Tranche 1 Debentures and Tranche 2 Debentures respectively had been converted into 164,462,733 common shares.

Note: It is very difficult to estimate a real number here until Q2 results.

7 - ($2.27 million) which will be paid by the insurance related to a Class Action lawsuit that PAL lost recently. The amount will be paid by the insurance and will not be added to the debt.

Subsequent to the quarter end, the Company entered into a proposed settlement for $2.4 million in respect of the previously disclosed potential class action lawsuit. The proposed settlement owing will be paid by the Company's insurer and there is no admission of wrongdoing on the part of the Company. The proposed settlement is subject to finalization of the settlement agreement and approval by the court.

8 - 4,200 oz palladium warrants (12,000 palladium warrants) still outstanding.

In conjunction with a $72.0 million term loan issued in 2011 and repaid in June 2013, a palladium warrant consisting of 0.35 of an ounce of palladium at a strike price of US$620 per ounce was issued with each $1,000 convertible debenture representing an aggregate of 25,200 ounces of palladium. As at April 30, 2014, 12,000 palladium warrants were outstanding representing 4,200 ounces. On the exercise of the palladium warrants, in certain circumstances the Company has the option of settling the warrants with either cash or common shares.

9 - Estimated 39 million share outstanding options and warrants.

  • In addition, there were options outstanding pursuant to the Amended and Restated 2013 Corporate Stock Option Plan entitling holders thereof to acquire 3,110,086 common shares of the company at a weighted average exercise price of $1.78 per share.
  • 16.8 million share warrants at $0.72 adjusted to 0.547 after Tranche 2, which are related to Tranche 1.
  • 18.9 million share warrants at 0.547 related to Tranche 2.

BAM Debt 15%

$ million


Debenture 6.15%

$ Million




$ Million


Leases at 10%?

$ Million


Asset retirment Obligation and letter of credit

$ Million


Warrants left from old debt.




Left after conversion of Tranche 1 and Tranche 2

$ Million


Corporate Options


Warrants from Tranch 1 and Tranche 2 Debenture 7.5%


Debt 173.2 40.33 36.4 17.32 27.44 - 6 - -
Options and warrants - - - - - -   3,110,086 shares at $1.78 35.7 million shares at $0.547
palladium warrants - - - - - 4,200 oz   - -

The total debt is $273 million, excluding all obligations, options and warrants indicated in the table above. The reduction in debt has been possible by paying an extra $7.2 million to BAM that will be posted in the Q3 results. The total interest on the debt is now approximately 11.7% or $32 million per annum.

Note: Applying the same calculation for the prepayment indicated above, in case of a PAL takeover, the suitor will be forced to pay BAM an amount of:

BAM Takeover = $173.2 + ($173.2 x 0.15 x 3) = $251 million.

This amount shows that any takeover outside Bankruptcy and negotiation with BAM is impossible.

2 - All-in cash cost or All cash cost for 2014?

This is a very important indicator that the company has refused, so far, to indicate to its nervous shareholders. I have been advocating that PAL indicates clearly this value and shows without any doubt, what is its cost of mining palladium. The actual cash cost is totally misleading, because it doesn't factor in the whole cost attached to the entire chain of production. Here is a definition of the All-cash cost:

All-Cash Cost = Total Cost (Net of by-product credits) indicated as Cash cost by PAL + Future exploration expense + G&A expense (Net of stock options) + Total Interest cost. The whole amount divided by the palladium production forecast for 2014 in Troy oz.

  1. Cash cost has been indicated at $492 for Q1 2014, and it is safe to take it as the cash cost for 2014.
  2. Capital expenditure will be probably around $35 million after Q1 presentation increase.
  3. G&A will be around $10.5 million
  4. Total interest cost is now down to $32.1 million. (Excluding Obligation amount, options and numerous warrants.)
  5. Including the extra-pre-payment fee of $7.2 million in 2014.
  6. Guidance for palladium production has been between 170koz to 175koz. I will take 172.5koz.

All Cash Cost = $492 + (35/172.5) + (10.5/172.5) + (32.1/172.5) + (7.2/172.5)

All Cash Cost = $984

This cash cost assumes a significant increase in production for the second half of 2014, which should reach 5,000 TPD by the end of 2014 from 3,065 TPD in Q1. In fact, it was only 2,999 TPD from the offset zone (excluding ore from the Roby zone.)

Payable palladium for Q1 was 39,485 oz, and will be around this amount in Q2 as well. PAL will have to increase production at around 47,000 oz in Q3 and Q4 to be able to meet its recent forecast, which is doubtful, assuming that the mine will have one or more "hiccups" before December, as they have been recurring for years, from an exceptional weather situation to technical problems or delays with the shaft handling.

This all-cash cost is not including the cost of warrants, options, obligation and extra-cost recurring almost quarterly that cannot be quantified fully; however, they will affect PAL results. It is safe to take an all-in cash cost at a minimum of $1,050/oz of palladium for a break-even value.
It means that until the palladium price trades above $1,050/oz and stays there, the company will be mining palladium at a loss.

3 - Commentary.

This simple exercise is showing that PAL has not really improved its financial situation with this new cash spending, in my opinion. I will be curious to hear Philippus Du Toit comments at the next conference call about this decision.

Despite the palladium spot-price gaining momentum and trading at over $860/oz, the mine is still losing roughly $150/oz to produce a Troy oz of palladium, and it is the sad bottom line.

In order to avoid a financial crash, PAL will have to rely on a palladium price at or above $1,050/oz until December to barely break even. Is it possible?

What is really the motive of this sudden illogical move, if the benefits are not clear? Is it making any financial sense to spend so much cash now? My answer is, of course not.

This last ill-timed interest re-payment to lower the interest on the BAM loan from 19% to 15% is not financially reasonable despite the obvious future benefits that may be seen, which are:

  • Reduction of the interest cost by 4%.
  • Put a stop to the debt increase at $173.2 million.

The company recently used an equity financing (Debenture at 7.5% Tranche 2) to get about $32 million (CAN$ 35 million) in cash to finance the capital expenditure for the remaining of the year 2014. So, PAL has said.

Then, less than three months later, PAL is paying BAM a total amount of $23.4 million cash, including the pre-payment fees. Furthermore, the company will have to pay BAM 15% interest in Q4 2014 or an amount of roughly $6.5 million. It is $30 million cash or basically the whole Tranche 2. A quick calculation gives a cash on hand down from $53 million to now $29 million only, including the Tranche 2 proceeds.

Here is what has been said about the use of the net proceeds, April 8,2014:

The net proceeds from the Offering are expected to be used for expenditures at the Company's Lac des Iles mine, exploration, mining equipment and for other general corporate purposes.

It is quite puzzling, and it seems that the company may have been forced to repay the loan interest by the Bank of Scotia in order to get the LOC reconducted for one year.

Now, PAL is paying an interest of 15% on its BAM loan which seems a positive, however, this is at the cost of another financial balance sheet cash weakness. The main problem I see is that PAL is again extremely low on cash, and will have to use probably another equity financing, Tranche 3, before the end of 2014, which may be deeply dilutive to shareholders.

Already, PAL has flooded the market with millions of new shares and 35.7 million share warrants at a strike price of $0.547. The next tranche will have another huge dilutive effect, by reducing the strike price from $0.547 to perhaps around $0.40, which will increase the warrants for Tranche 1 and Tranche 2, and will add another 20 million warrants at 0.40s. Assuming another financing of $30 million, the total warrants will be close to 60 million at a strike price of $0.40s, not to mention another 120 million shares outstanding that will be added to the actual outstanding, which is around 360 million to 400 million.

The next earnings will probably give some answers to this sudden move and its financial "logic."

I still rate PAL as SELL, until palladium price reaches and passes the 1,050/oz mark.

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