While metals like gold and silver have bulls coming out of the woodwork, another precious metal has been quietly ripping. Although palladium is part of the platinum group of metals, it is used in many items that are anything but precious. It helps keep the air clean and is also used in cell phones and the computer I am typing on. One thing to make clear, there is a large demand for palladium and this could continue for some time in the near future.
North American Palladium (PAL) has seen its stock almost triple since September. This company is a precious metals producer in a mining friendly locations. It has one of the two primary palladium mines in the world and a gold mine that helps to provide growth. North American Palladium has a pipeline of projects that will provide growth in both palladium and gold.
LDI is its palladium mine. This location has been producing palladium since 1993. It has become a low-cost, long-life mine. There is significant upside production. North American Palladium has its Sleeping Giant Gold Mine, which has been producing gold for 20 years. There is further potential here at a greater depth. Increased utilization of the mill could provide for other developing projects.
To further understand this company, one must identify with current palladium supply and demand. Currently, there is only 6.3 Moz annual production worldwide. Russia produces 43%, South Africa 41%, and North America 11%. These are the three main areas, with others making up the remaining 5%. There is also a secondary supply making up 1.34 Moz. per year. Since 2006 there has been a reduction in the amount of production of palladium coming from Russia and South Africa, although 2010 numbers were higher than 2009.
Demand comes from several sources but mostly from automobile demand. Some 53% of the palladium produced goes into autos, 15% electronics, 11% dental, 10% Chinese jewelry, and the other 11% is goes to mixed sources such as chemical and petroleum catalysts. Much of this use has been spurred by global small auto demands. There are several reasons for this in the United States and abroad, as oil prices have increased and emerging markets have begun to develop a middle class. Global light vehicle production in 2009 was 57 million. By the end of 2011 it is estimated at 75 million, and in 2016 an estimated 94 million will be produced. Just looking at the BRIC nations (China, South America and South Asia), demand will increase from 20 million in 2009 to 40 million in 2016. In my opinion, this number could be 20-30% larger depending on worldwide economic growth.
Palladium usage is also increased with higher emission standards. These standards create the adoption of the use of catalytic converters, and with each emission tightening, higher palladium loadings are needed. Using China as an example, each tightening of emissions creates a 10% more palladium used. Catalytic converters are used in gasoline, diesel and hybrids. Although gasoline driven vehicles use more palladium, an increased level is needed in newer low sulfur deisel fuels. There is also increased demand for palladium created by ETFs. This is estimated at 2.3Moz. with WITE, GLTR, and PALL.
The price of palladium has increased from $200/oz. in 2009 to $800/oz. in early 2011. On January 31, the price of palladium was $812/oz., already surpassing most price targets for the year and getting closer to the historic high of $1,090/oz. in 2001. Palladium was the best performing precious metal of 2010.
LDI is a world-class mine and one of the two primary palladium mines in the world. Open pit commenced operations in 1993. Underground mining from the Roby Zone commenced in 2006. Further mine expansion is underway and should complete by the 4th quarter of 2012. It also has a 15,000 tpd utilized mill. LDI will be increasing production by 75% in 2011.
North American Palladium is a low cost palladium producer. It is currently transitioning from mining via ramp to shaft. This transition to a super shrinkage mining method is similar to Agnico-Eagle's (AEM) Goldex mine. This will help to increase production while minimizing additional costs. The LDI mine's shaft is being sized for 7,000 tpd, with shaft target mining rate being 3,500 tpd in the 4th quarter of 2012, and 5,500 tpd the 1st quarter of 2015. At this time, the mine's production is expected to exceed 250,000 oz/year, while cash costs decrease to less than $150/oz. Production increases should look like this:
- 2010 production-95,100 oz./year
- 2011 production-165,000 to 175,000 oz./year
- 2012 production-190,000 to 200,000 oz./year
- 2013 production-200,000 to 220,000 oz./year
- 2014 production-220,000 to 240,000 oz./year
- 2015 production-250,000+ oz./year
I know it sounds good, but what does it cost? In 2011, capital expenditures total $147 million with a 13.7% contingency. Total pre-commercial capital expenditures (2012) are $204 million with a $25 million contingency. Post commercial capital expenditures is estimated at $72 million (2013-2014) with a $7 million contingency.
There is an exploration program underway at LDI. An $8.8 million budget has been set aside for 32,000 m of drilling. There is 25,000 m at LDI, 3,000 m at Legris Lake, and 4,000 m at North American Palladium's other properties. North American Palladium has areas close by that have been underexplored and could produce further large palladium finds.
The Sleeping Giant Mine was acquired in May of 2009. IAMGold (IAG) was the previous operator. This location produced 58,000 oz./Au per year. Over 20 years, the Sleeping Giant produced over a million oz./Au total. In 2010, this mine produced 17,550 oz. of Au. The initial 2011 forecast is for production of 30,000 to 35,000 oz./Au. This year should see improvements in total ore processed, head grade to mill, mining rate, gold mill recovery and cash costs per oz. These improvements will be gained by deepening the Sleeping Giant shaft to get access to new areas. Cash costs per oz. are estimated to improve to $1,200-$1,300/oz. This should further improve in 2012 to $700-$750/oz. 2012 production will improve to 40,000-50,000 oz. Au.
The Sleeping Giant mill should provide added utilization for other of NAP's properties. This 900 tpd mill is currently running at half capacity. A capacity increase to 1,250 tpd will cost about $7 million. Another $3 million will further increase capacity to 1,750 tpd.
NAP also has development properties including the Veeza Gold project. Located 85 km from Sleeping Giant mill, $26 million will be spent this year on exploration and development of this project. This expenditure is reduced to a net $18 million the first year after $8 million in production revenue. By the end of this year it will be advanced to a production level decision. Production could begin the first quarter of 2012 with a production potential of 39,000 Au oz./yr. and an Estimated mine life of seven to nine years. Cash costs are $700/oz. A mining rate of 750 tpd is expected. Resources measured and indicated are 288,000 oz. Au (5.9 g/t). Inferred are 121,000 oz. Au (5.0g/t). The addition of Veeza to Sleeping Giant gold production, would almost double estimated 2012 production estimates.
Other mining areas are possible. These include Flordin, Discovery and Dormex. They are all located within 80km of the Sleeping Giant mill. Flordin has M&I of 92,000 oz of Au and 169,000 inferred. Discovery has M&I of 237,000 oz. of Au and 294,000 inferred. Discovery also has Au production potential of 44,000 oz/year for four years. Most of the Dormex numbers are to be determined. It should also be noted that the Sleeping Giant mine has the potential for 125,000 oz per year of Au after expansion. Some $9.1 million has been budgeted for Sleeping Giant and other properties.
In summary, North American Palladium has many different areas that will help grow this company. First and foremost is their palladium mine. This expansion could increase growth and also capitalize on increases in price. It seems much of the uses for this metal will increase going forward. Its gold production is also interesting as it has the ability to increase production in a very tight area, utilizing a centralized mill that can be expanded as needed. Although some may think this stock has had too much of a run, it seems that based on palladium pricing this stock could continue to push upward in either the short or longer term. The current run of this company looks to have sustaining qualities, and the company is a buy until something changes.