North American Palladium And The 'Recurring Hiccup' Theory

Aug. 1.14 | About: North American (PAL)


North American Palladium released its second quarter results with production down 8% quarter to quarter, and warned about weak production for the third quarter.

As expected in my previous article PAL is now dangerously low in cash after repaying $23.4 million to BAM. It raises the somber prospect of another equity financing in 2014.

PAL may have to reduce its 2014 production forecast depending on how low production is the next quarter.

North American Palladium (NYSEMKT:PAL) released its second quarter results. Shareholders were again surprised by the weakness in production and the low-level in cash remaining after the payment of $23.4 million to BAM in order to reduce the debt interest to 15% from 19%.

What is the debt after second quarter 2014?

Today C$ = 0.9172 $US

This is what every shareholder should consider first before investing in this company. The debt level is unsustainable and time is running out.

1 - The bulk of the money owed comes from the Brookfield's (NYSE:BAM) loan (06/07/2013). The amount due is now $173.2 million at an interest going of 15%.

Here is an excerpt of the last press release concerning the repayment of the debt:

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

2 - C$43M ($39.44 million) in debenture at 6.15% due September 2017.

3 - $37.1 million of a $60 million operating line of credit due July 4, 2015. From the last PR release:

As of June 30, 2014, the company's credit facility availability was limited by the borrowing base to US$42, 8 million of which US$37. 1 million was utilized.

Interest at approximately 5.5%

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 - $2 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 Q3 results.

7 - 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.

8 - Estimated 39 million shares 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 a strike price of $0.72 adjusted to 0.547 after Tranche 2, which are related to Tranche 1.
  • 18.9 million share warrants at a strike price of 0.547 related to Tranche 2.

BAM Debt 15%

$ million


Debenture 6.15%

$ Million




$ Million


Leases at 10%?

$ Million


Asset retirement 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 39.44 37.1 17.32 27.44 - 2 - -
Options and warrants - - - - - - 3.1 million shares at $1.78 35.7 million shares at $0.547
Palladium warrants - - - - - 4,200 oz - -
Click to enlarge

The total debt is $269 million, excluding all obligations, options and warrants indicated in the table above. The total interest on the debt is now approximately 11.7% or $31.7 million per annum.

Comparison Quarter to Quarter.

Production results YTD Q2 2014 Q1 2014 Change QTQ %

Palladium Production

Payable oz

81,864 39,223 42,641 -0.08
Cash cost $ 501 510 492 +3.7
Production from Offset zone in TPD 2,983 2,900 3,065 -5.4
Grade Gr/T 3.2 3.1 3.3 -6.1
Milling Palladium recovery % 84.1 83.6 84.5 -1.1
Click to enlarge

Financial results Quarter to Quarter.

Financial results July 2014 Q2 2014 Q1 2014
Cash on hand $ Million 19 44.305 21.921
Shares Outstanding 362.801 349.556 232.874
Loss in $ Million - 9.957 26.666
Total revenues $ Million - 50.497 48.736
Click to enlarge

On July 7, 2014, the Company announced that it had paid US$23.4 million to its senior secured term loan lender representing US$16.2 million of accrued interest and US$7.2 million of associated pre-payment fee. Effective June 30, 2014, the Company reverted to a 15% annual interest rate on the senior secured term loan and the Company's cash balance, after reflecting the payment, was approximately $19 million.


Definition of "hiccup"

A slang term for a short-term disruption within a longer-term plan, goal, or trend. A hiccup can be used to describe the business actions of a particular company, a stock price downturn, or the stock market as a whole. Generally, a hiccup is not indicative of a larger trend, but is considered an aberration.

Source: Investopedia

The second quarter results were again disappointing with an 8% drop in palladium production despite the palladium spot price increasing significantly. The scary part is that production per ton per day (TPD) is going down to now 2,900 TPD with a cash cost increasing nearly 4% from quarter to quarter. The company is still confirming that it will be able to reach 5,000 TPD by the end of 2014. However, we have to wonder how this goal can be possibly attained?

Furthermore, it is becoming more evident that the production forecast for the whole year 2014, which is between 170koz to 175koz, is very difficult to achieve, after the company indicated that the third quarter will be another lackluster event.

Let's look at the tables above. Production for the first six months was 81,864 oz of palladium. It means that the combined production for the two remaining quarters of 2014 should total an amount equal or greater than 88,136 oz. Assuming a better hosting in Q3 at around 3,500 TPD for August and September and 2,000 TPD for July due to the unfortunate fatality. PAL will be producing the same amount as the first quarter or slightly less, in my opinion. Production will be around 40k oz again at best.

Here's what the company said:

The fatality at the mine site, which was previously reported on July 11, 2014, has impacted production for the first few weeks of July and is expected to result in lower production in the third quarter of 2014. Production is returning to normal and remediation steps are being implemented.

The total production estimated for the first nine months of 2014 will be roughly 122K oz, which means a minimum production for Q4 around 48K oz.

Assuming that the mine is prone to "recurring hiccups" the probability of a new disruption(or disruptions) in the production line until December is almost a certainty. Thus, it is highly improbable that the company will be able to meet the 2014 forecast. Production between 162k oz to 165k oz is more reasonable.

The cash remaining after paying part of the BAM debt is a source of great concern and presents extra risks or an unnecessary gamble. The company indicated that it has roughly $19 million left on July 7, 2014, and the LOC has been drawn almost totally ($5.7 million left).

Until now, PAL was not paying the BAM interest. However, this will change in the third quarter, and the company will have to pay roughly $6.5 million extra interest per quarter. PAL will have to pay two times this amount before the end of 2014, which will eat up the cash on hand.

This fact makes it hard to imagine PAL avoiding another equity financing early in Q4 or even during Q3 depending on the palladium spot-price.


North American Palladium is going the wrong direction and quarter after quarter results are confirming this fact. I wonder what really could save this company as it is, now?

This company reminds me of King Sisyphus, punished for deceitfulness by being forced to roll a large boulder up to a hill, only to watch it roll back down the slope, and to repeat the task forever.

The cash on hand left after the recent BAM payment is only $19 million for the remaining of the year, which is evidently insufficient and will require another equity financing in all probabilities. This is another dilution that will push the stock price into new low territory and may precipitate the PAL collapse.

As I have written in my preceding article, the payment to BAM was not a smart idea at all and should have been postponed to Q4 or even 2015. The company used the "costly borrowed cash" to pay off $16.2 million to BAM at an incredible cost.

First, PAL had to pay the "commitment fees" or an extra $7.2 million to BAM. However, the cash used was from the Tranche 2 which cost another terrible dilution to shareholders. I remind all that the debenture at 7.5% could be converted in shares immediately with the whole five years interest paid upfront, not counting the warrants at 0.547.

At last, the company will have to pay $6.5 million per quarter now in interest to BAM alone, which will drain the remaining cash on hand.

Risks of dilution are very high as I explained above, and the stock price will eventually dive well under 0.20 depending on the palladium spot price. This situation may be the beginning of the end for the company as it is. Due to an amount of shares outstanding now close to 400 million and a low stock price, the NYSE may force the company to reverse split 1:10, which will be even more damaging.

The question is what could be done to change this bleak outlook?

Unfortunately, I do not see any real solution for actual PAL shareholders. However, the mine can go through a re-organization that will be very beneficial financially for the company. After listening to the conference call we can see that the mine has some future potential under the 1,065 m level.

By declaring bankruptcy, the LDI mine will be getting a new life along with a brand new owner. The debt will disappear practically, and the mine will be cash flow positive and profitable again. This revived situation will open an opportunity for a fresh buyer who can take over the mine which will be now worthwhile in this new paradigm. Stillwater Mining (NYSE:SWC) may be a good candidate in this case. Management will thrive, employees will keep working and production will increase.

BAM will find a suitor who will be willing to acquire and operate the mine at an appealing price and may give a new financing at an attractive interest well under 10%. Actual shareholders will be history as usual and left with crumbs or nothing. Someone has to pay, right?

I am confirming my SELL rating with a target around 0.15 or less, assuming that PAL can avoid bankruptcy?

Disclosure: The author is long SWC. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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