Keith Minty, a big man in a small office, shifts uncomfortably in his chair as he contemplates a brighter future for North American Palladium. Now that a US$90 million loan to finance a major expansion of the Lac des Iles mine in northwestern Ontario is in the bank (note to editor: closing expected by May 1), the palladium producer will be able to rent a bigger office with better chairs and maybe even a view.
Meanwhile the Thunder Bay-based company will control costs by sharing a cramped space in a downtown Toronto office building. In 1998 North American Palladium lost $17.5 million and the company currently carries a $120 million long-term debt to its majority shareholder, Kaiser-Francis Oil Company.
Although expected to report another net loss for 1999, North American Palladium turned profitable on an operating basis not long after President and Chief Executive Officer Minty joined management two years ago. There is still some way to go.
“Just a year ago, anybody who knew us wrote us off as a basket case,” Minty admits.
That was before the producer announced a fourfold increase in resources at the Lac des Iles open pit mine, an increase that, coupled with rising palladium prices, should transform North American Palladium into a significant moneymaker.
Between early 1998 and January 2000, palladium resources at Lac des Iles, Canada’s only primary palladium producer, grew from 1.3 million ounces to more than five million ounces. During the same period, palladium prices nearly doubled from a 1998 average of US$290 per oz. to more than US$500 per oz., while shares of North American Palladium soared from pennies to a high of more than $12.
“There was a vision on the exploration front and a willingness on the part of the major shareholder to support that vision financially,” says Director Richard Sutcliffe, referring to the 50,000-metre drill program that delineated the new ore. “The net result has been an opportunity for the company to move forward on a completely different scale.”
Based on proven and probable reserves of 74 million tonnes averaging 1.64 grams palladium per tonne plus lesser amounts of platinum, gold, copper and nickel at Lac des Iles, North American Palladium is planning to expand production from 2,400 to 15,000 tonnes per day at a capital cost of US$127 million by 2002. Subject to financing and environmental permits, a new processing plant will churn out about 250,000 oz. of palladium annually, or 5% of world supply, at a cash cost of US$131 per oz., net of other metal credits and excluding royalties.
At US$320 per oz palladium, the estimated internal rate of return (IRR) on the project is about 27%, an exceptional IRR for the mining business.
At presstime, the company had just secured an agreement from a syndicate of three Canadian banks for a US$90 million loan to expand Lac des Iles and is expected to raise the remainder of the financing through an equity offering.
Palladium is one of the platinum group metals. Its physical and chemical properties, including a high melting point and resistance to corrosion, make the metal especially suitable for use in catalysts and in alloys for the electronics industry.
Palladium prices are expected to remain robust because of increasing demand and tight, often unreliable, supply. Last year, the world consumed 8.3 million ounces of the precious metal but produced only 5.2 million ounces. The deficit was made up from Russian stockpiles.
“Palladium prices may appear to have risen too far already, but the potential for continued growth in demand from auto catalysts, industrial process catalysts and even electronics suggest that palladium prices may increase even further,” says commodities researcher CPM Group.
The largest and fastest growing use of palladium is in the manufacture of auto catalysts to reduce hydrocarbon emissions from cars, trucks and increasingly popular sports utility vehicles. This market has grown by about 30% since 1993 in response to legislation forcing tighter controls on emissions in North America and is expected to continue to expand as other nations adopt similar standards, according to precious metal refiner Johnson Matthey.
Meanwhile, the reliability of supply – of which about 60% comes from Russia and most of the rest from South Africa – is cause for concern among automobile manufacturers. Minty says the car companies would welcome a new producer located in a politically stable country.
“The car companies couldn’t car less what the price of palladium is. Even if it reaches US$1,000 per oz., this would only increase costs by about US$100 per car, “ says Minty. “All the end users want is assured supply.”