Form 6-K
SECURITIES AND EXCHANGE COMMISSION
Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16 of
The Securities Exchange Act of 1934
For the month of May, 2006 Commission File Number: 1-15142
NORTH AMERICAN PALLADIUM LTD.
(Name of Registrant)
130 Adelaide Street West
Suite 2116
Toronto, Ontario
Canada M5H 3P5
(Address of Principal Executive Offices)
Indicate by checkmark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F:
Form 20-F [ ] Form 40-F [X]
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(1): __
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(7): __
Indicate by checkmark whether the registrant, by furnishing the information
contained in this Form is also thereby furnishing the information to the SEC
pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:
Yes [ ] Assigned File No. ____________ No [X]
If "Yes" is marked, indicate the file number assigned to the Registrant in
connection with Rule 12g3-2(b).
The number of common shares of the Registrant issued and outstanding as of May
12, 2006 is 52,345,873.
This report on Form 6-K, dated May 12, 2006, is specifically incorporated by
reference into North American Palladium's registration statement on Form S-8
(File No. 333-13766), which was originally filed with the Securities and
Exchange Commission (the "SEC") in July 2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NORTH AMERICAN PALLADIUM LTD.
Date: May 12, 2006 By: /s/ Mary Batoff
--------------------- ---------------------------------------
Mary Batoff
Title: Vice President, Legal and Secretary
EXHIBIT INDEX
Exhibit Description of Exhibit
--------------------------------------------------------------------------------
1 Management's Discussion and Analysis of Financial Results First
Quarter 2006
2 Interim Financial Statements for the period ended March 31, 2006
EXHIBIT 1
Management's Discussion and Analysis of Financial Results
First Quarter 2006
The following is Management's Discussion and Analysis of the financial
condition and results of operations to enable a reader to assess material
changes in financial condition and results of operations for the three month
period ended March 31, 2006, compared to those of the respective period in prior
years. This Management's Discussion and Analysis covers the most recently
completed quarter and has been prepared as of May 5, 2006. This Management's
Discussion and Analysis is intended to supplement and complement the unaudited
consolidated financial statements and notes thereto for the three months ended
March 31, 2006 (collectively, the "Financial Statements"). You are encouraged to
review the Financial Statements and the most recent audited annual financial
statements, Management's Discussion and Analysis included in the 2005 Annual
Report, in conjunction with your review of this Management's Discussion and
Analysis.
About Forward-Looking Statements
Securities laws encourage companies to disclose forward-looking information
so that investors can obtain a better understanding of the company's future
prospects and make informed investment decisions. This MD&A contains
forward-looking statements about our objectives, plans, strategies, financial
condition and results of operations. Forward-looking statements may include
words such as "estimated", "progressing", "expect", "will", "continue",
"believe" and other similar expressions are intended to identify forward-looking
statements. All such forward-looking statements are made pursuant to the "safe
harbor" provisions of the United States Private Securities Litigation Reform Act
of 1995 and any applicable Canadian securities legislation, including the
Securities Act (Ontario).
It is important to note that: (1) unless otherwise indicated,
forward-looking statements indicate our expectations as at May 5, 2006; (2) our
actual results may differ materially from our expectations if known and unknown
risks or uncertainties affect our business, or if estimates or assumptions prove
inaccurate; (3) we cannot guarantee that any forward-looking statement will
materialize and, accordingly, you are cautioned not to place undue reliance on
these forward-looking statements; and (4) we disclaim any intention and assume
no obligation to update or revise any forward-looking statement even if new
information becomes available, as a result of future events or for any other
reason.
In making the forward-looking statements in this MD&A, the Company has
applied several material assumptions, including but not limited to, the
assumption that market fundamentals will result in increased palladium demand
and prices, the integrated operation of the underground mine with the open pit
mine are viable operationally and economically and plans for sustainable
recoveries from the Lac des Iles mine, for further explorations at the Lac des
Iles mine and for exploration in Finland can proceed as expected. Other
assumptions are discussed throughout this MD&A and, in particular, in "Critical
Accounting Estimates" and "Risks and Uncertainties".
-2-
Important factors that could cause actual results to differ materially from
those expressed or implied by such forward-looking statements include among
others metal price volatility, economic and political events affecting metal
supply and demand, fluctuations in ore grade, ore tonnes milled, geological,
technical, mining or processing problems and future production. For a more
comprehensive review of risk factors, please refer to the Company's most recent
Annual Report under "Management's Discussion and Analysis of Financial Results"
and Annual Information Form under "Risk Factors" on file with the U.S.
Securities and Exchange Commission and Canadian securities regulatory
authorities.
Overview and Strategic Activities
North American Palladium Ltd. (the "Company") operates the Lac des Iles
mine located 85 km northwest of Thunder Bay, Ontario. The mine is Canada's only
primary producer of platinum group metals ("PGM") and contains one of the
largest open pit bulk mineable palladium reserves in the world. In addition to
palladium, the Company earns substantial revenue from by-product nickel,
platinum, gold and copper. Palladium's primary use continues to be in the auto
industry where it is an important component in controlling exhaust emissions as
mandated by stringent hydrocarbon emission standards for cars, light trucks and
SUVs, particularly in the United States, Europe and Japan. In addition,
palladium is consumed in the dental, electronics, jewelry and chemical sectors.
The Company commenced the development of an underground mine at its Lac des
Iles operation in the second quarter of 2004. The underground mine development
is focused on the Main High Grade Zone below the ultimate open pit depth.
Capital costs for the underground development are estimated at $40 million for
direct and indirect costs and working capital. Mining equipment accounts for an
additional $12 million of capital costs and the Company is financing this
equipment through a vendor lease program. At the time of writing, the
underground mine has progressed to the 5155m level (approximately 155 metres
below surface) with one stope in production and two others progressing towards
production in the near term.
At March 31, 2006, the underground mine operations achieved commercial
production, by delivering an average of 80% of the expected commercial
production target of 2,000 tonnes per day for thirty consecutive days ending
March 31, 2006.
On October 18, 2005, the Company announced that it had entered into a
letter of intent to form a joint venture with Gold Fields Limited to further
explore and develop a mining operation at the Arctic Platinum Project ("APP")
located in Finland (see press release dated October 18 2005). The APP includes
several advanced stage PGM Projects. The Company has been granted an option to
earn up to a 50% interest and, in certain circumstances, a 60% interest in APP
and will become the project operator. In order to exercise the option, the
Company must spend US$12.5 million, complete a feasibility study and make a
production decision, as well as paying Gold Fields up to US$45 million (for a
60% interest) through the issuance of the Company's common shares (approximately
9.2 million shares) on or before August 31, 2008. The formal agreement governing
the joint venture was signed on March 24, 2006.
-3-
The Company announced on September 29, 2005, that the shareholders of URSA
Major Minerals Incorporated ("URSA") approved the option and joint venture
agreement on the Shakespeare nickel, copper, PGM property located near Sudbury,
Ontario and the Company paid $1.5 million to URSA to complete its option
earn-in. The property is proposed to be a 60% North American Palladium, 40% URSA
Joint Venture with the Company becoming the operator upon successful completion
of a viable feasibility study and arranging financing for commercial production.
In March 2006, URSA presented to the Company the completed feasibility study
which contemplates an open-pit mine and 4,500 tonne per day concentrator. The
Company and URSA are currently evaluating opportunities to reduce the estimated
capital costs of the project and URSA has engaged Golder Associates Limited to
manage the permitting process of the proposed mine site.
Currently, the Company is delivering and selling all of its palladium
production into the spot market with one or more commodity dealers and
manufacturers. The Company expects the improvement in the palladium price to
continue (first quarter 2006 ending price of US$330 per ounce, in comparison to
US$190 per ounce average during the first quarter of 2005), and is optimistic
that the demand for palladium will continue to improve given the strong global
fundamentals for PGM's.
[LINE CHART OMITTED]
Source: Johnson Matthey
-4-
Production Statistics
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Three months ended
March 31
--------------------------------------------------------------------------
2006 * 2005
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Palladium (oz) 47,015 52,572
Payable Palladium (oz) 42,784 47,924
Platinum (oz) 4,698 5,382
Gold (oz) 3,615 4,131
Copper (lbs) 1,213,394 1,562,040
Nickel (lbs) 616,037 778,200
--------------------------------------------------------------------------
Ore Tonnes Milled 1,125,710 1,156,322
Ore Tonnes Mined - Underground 103,545 --
Ore Tonnes Mined - Open Pit 1,075,597 1,268,875
Waste Tonnes Mined - Open Pit 2,366,675 3,341,433
--------------------------------------------------------------------------
Waste Strip Ratio - Open Pit 2.20:1 2.63:1
--------------------------------------------------------------------------
* Metal production and tonnes milled includes production from the underground
preproduction that has not been recorded as revenue, but offset against the
underground capital development costs. Metal production from the underground
pre-production included 9,004 oz of palladium and other associated by-product
metals.
Selected Annual Information
(thousands of dollars except per share amounts) 2005 2004 2003
-----------------------------------------------------------------------------------------------
Revenue from metal sales 92,606 185,204 192,141
Net income (loss) (53,611) (92,110) 38,378
Basic net income (loss) per share (dollars) (1.03) (1.79) 0.76
Cash dividends declared nil nil nil
Operating cash flow (39,000) 52,059 59,802
Total assets 238,357 297,897 393,692
Long-term debt, including current portion 46,272 50,171 58,761
Summary of Quarterly Results
2004 2005 2006
------------------------------------------------------------------------------------------------------------------
(thousands of dollars except
per share amounts) Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
------------------------------------------------------------------------------------------------------------------
Revenue from metal sales 51,712 45,154 35,182 26,206 23,544 17,247 25,609 31,492
Net income (loss) 2,834 6,598 (107,663) (7,736) (15,228) (19,610) (11,037) (4,141)
Basic net income (loss) per
share 0.06 0.13 (2.09) (0.15) (0.29) (0.37) (0.21) (0.08)
Fully diluted net income
(loss) per share 0.06 0.13 (2.09) (0.15) (0.29) (0.38) (0.21) (0.08)
------------------------------------------------------------------------------------------------------------------
-5-
Results of Operations
The Company realized a net loss for the three months ended March 31, 2006
of $4,141,000 ($0.08 per share) on revenues of $31,492,000 compared to the net
loss of $7,736,000 ($0.15 per share) on revenues of $26,206,000 for the
corresponding period in 2005 and to 2005 fourth quarter's revenues of
$25,609,000 and loss of $11,037,000 ($0.21 per share). The improvement in
operating results is primarily due to increased revenue being realized from the
higher average prices for palladium and all by-product metals during the
quarter.
Production for the first quarter of 2006 was approximately 47,000 ounces of
palladium (which includes 9,004 ounces of pre-production from the underground
mine) with an average palladium head grade of 1.79 g/t. This was an improvement
from the fourth quarter's palladium production of 37,000, ounces but below the
previous year's production of 53,000 ounces during the same period. Operating
disruptions with the primary crusher (which led to having to utilize a crushing
contractor) and the #1 conveyor resulted in a decrease in mill throughput and
availability. In addition, in early February, as previously reported, there was
seepage at the tailings management facility ("TMF"), which resulted in the
closure of the mill for five days. Despite these problems, mill availability
during the first quarter of 2006 improved to 86.0% from 80.8% during the fourth
quarter of 2005 and was marginally below the 86.3% in the comparative period of
2005.
While production for the first quarter of 2006 declined 29% compared to the
year earlier period, the strengthening metals market resulted in an increase in
revenue with palladium being recognized at the quoted March 31st price of US$330
per ounce. Palladium production sold to third-party smelters takes up to six
months from time of receipt at the smelter to settle the final delivery and
pricing. The price adjustment relating to palladium settled and awaiting
settlement in first quarter of 2006 resulted in an increase of $4,429,000
palladium revenue being recorded, mainly from fourth quarter 2005 production
when revenue was recorded at US$256 which has now been adjusted to the quoted
March 31, 2006 market price of US$330. The adjustment for mark to market in the
corresponding period in 2005 was $326,000. During the first quarter of 2005
revenue on 6,403 ounces was recorded at the floor of US$325 under the Palladium
Sales Contract, while the remainder was recorded at the quoted market price of
US$199 for a blended average price of US$224 per ounce. By-product metal
production reflected a similar volume decline as palladium production, however,
the strengthening metals market resulted in improved prices and revenues for all
the by-product metals.
In the first quarter of 2006, the underground development was completed
with commercial production being achieved as of March 31, 2006. During the
quarter 103,545 tonnes of ore was extracted from the underground mine, with
89,387 tonnes being processed by the mill at an average grade of 3.90 grams per
tonne, producing 9,004 ounces of palladium using the average recovery rate of
72.7% achieved by the mill for the
-6-
quarter. In addition, the underground operations produced 555 ounces of
platinum, 685 ounces of gold, 138,702 pounds of copper and 63,279 pounds of
nickel. As required under Canadian GAAP, revenue, net of associated production
costs, from the first quarter's underground mine production (the pre-production
period) has been recorded as a reduction in the underground development costs as
all costs associated with this development work were capitalized in the quarter.
Beginning in April, production from the underground mine will be recognized as
revenue and the associated development costs will be amortized over the expected
life of the underground mine.
Production costs including overheads but excluding non-cash amortization
were $24,311,000 during the first quarter of 2006, compared to $23,233,000
during the first quarter of 2005. Unit costs to produce palladium (production
costs including overhead and smelter treatment, refining and freight costs), net
of by-product metal revenues and royalties, increased to US$329 per ounce in the
first quarter of 2006 compared to US$253 per ounce in the first quarter of 2005,
and lower than the fourth quarter 2005 cash cost per ounce of US$417. The
increase in unit cash costs is attributable to the 29% decline in metals
production as well as the costs incurred during the first quarter 2006 to
resolve the TMF seepage issues, repairing the primary crusher and the #1
conveyor as well as some unplanned maintenance on the hydraulic shovels. In
addition, there continues to be ongoing upward pressure on operating costs,
particularly power, diesel fuel and tires.
During the first quarter of 2006, the mill processed 1,125,710 tonnes of
ore or an average of 12,508 tonnes per day, with a palladium grade of 1.79 grams
per tonne producing 47,015 ounces of palladium at a recovery rate of 72.7%.
These production numbers include the throughput from the underground referred to
above, which is not classified as revenue in the quarter. This compares to the
first quarter of 2005, when the mill processed 1,156,322 tonnes of ore or an
average of 12,848 tonnes per day with a palladium grade of 1.91 grams per tonne
producing 52,572 ounces of palladium at a recovery rate of 74.0%. The mill
production for the quarter was impacted by some residual problems associated
with the primary crusher, as well as the TMF seepage in February, which resulted
in five days of lost production. These issues have been resolved and
expectations are that production will return to normal historical levels.
Non-cash amortization decreased to $3,608,000 in the first quarter of 2006
compared to $4,729,000 million in the first quarter of 2005. The lower
amortization amount is attributable to the 29% decrease in palladium production.
In addition, in the first quarter of 2006, $1,444,000 of amortization was
capitalized to crushed and broken ore and concentrate inventories, compared to
nil in the corresponding period of 2005 because of the then low price of
palladium.
For the first quarter of 2006, there was a $3,467,000 loss from mining
operations compared to a $8,991,000 loss in the corresponding period a year
earlier, primarily due to improved metal prices. Included in the 2006 results
was $1,408,000 spent on exploration on the APP as the Company began activities
in Finland. Costs associated with the APP project will be charged to earnings as
they occur until it is determined that the project can be economically
developed, at which time they will begin to be capitalized.
-7-
Other income and expense, which includes interest income and expense, and
foreign exchange gains and losses, was an expense of $1,397,000 in the first
quarter of 2006 compared to an expense of $210,000 in the first quarter of 2005.
In the current year there was a foreign exchange loss of $281,000 compared to a
loss of $64,000 in 2005. The foreign exchange loss relates primarily to the
Company's US dollar denominated credit facilities as a result of the temporary
weakening of the Canadian dollar at quarter end. In the first quarter of 2006,
the Company incurred interest expense on long-term debt of $695,000 compared to
$635,000 in the first quarter of 2005. The increased interest expense in the
current year reflects the increase in interest rates year-over-year. During the
first quarter, the Company wrote-off the costs associated with its expiring base
shelf-prospectus totaling $504,000. Interest income for the first quarter
declined to $83,000 from $489,000 in the first quarter of 2005 as a result of a
lower average cash position in 2006.
Liquidity and Capital Resources
Cash used by operations (prior to changes in non-cash working capital) was
$362,000 in the first quarter of 2006, compared to cash used in operations of
$3,963,000 in the first quarter of 2005. The improvement in operating cash flow
was attributable to the improved metals pricing in the quarter. Changes in
non-cash working capital consumed $10,082,000 in the first quarter of 2006 as
compared to providing $14,873,000 in first quarter of 2005. Palladium awaiting
settlement increased to 72,624 ounces, which includes underground preproduction,
at March 31, 2006 compared to 65,905 ounces at December 31, 2005. The increase
in the physical quantity of metal in the concentrate awaiting settlement
combined with the stronger metal prices resulted in a 32% increase in the value
of concentrate awaiting settlement during the first quarter 2006 of $12,039,000.
After allowing for non-cash working capital changes, cash used by operations was
$10,444,000 in the first quarter of 2006, compared to cash provided of
$10,910,000 in the first quarter of 2005.
Investing activities required $7,435,000 of cash in the first quarter of
2006 the majority of which was attributable to the ongoing underground mine
development, which commenced in mid 2004 and which reached commercial production
as of March 31, 2006. This compares with $6,069,000 of net investing activities
in corresponding period for 2005.
On March 29th, the Company closed the first tranche (Series 1) of a private
placement of convertible notes which provided US$35,000,000 in gross proceeds to
the Company. The transaction was with two purchasers, Kaiser Francis Oil Company
("KFOC), the Company's largest shareholder, and an institutional investor. The
convertible notes bear an interest rate of 6.5% and mature October 1, 2008. The
notes can be converted into common shares of the Company at US$12.18 (2,873,563
common shares) and also have attached warrants which can be exercised to
purchase 1,436,782 common shares at US$13.48 until March 29, 2010. Under the
terms of the private
-8-
placement, the Company has the right to sell to KFOC up to US$13,500,000
principal amount of convertible notes on or before June 30, 2006, the proceeds
of which will be used to repay the loan outstanding under the KFOC standby loan
facility. The terms of the convertible notes are more fully described in note 6
of the accompanying Financial Statements.
As at March 31, 2006, the Company had cash and cash equivalents of
$36,290,000. With the expectation of production improving throughout the year
and returning to its historical levels, and the current commodity prices
continuing, the Company believes it has sufficient capital resources to fund its
operations in 2006.
Contractual Obligations
------------------------------------------------------------------------------------
as at March 31, 2006
(thousands of dollars) Payments Due by Period
Total 1 Year 1 - 3 Years 4 - 5 Years
------------------------------------------------------------------------------------
Senior credit facility $22,672 $ 6,668 $13,337 $ 2,667
Kaiser-Francis credit facility * 15,756 15,756 -- --
Capital lease obligations 7,963 2,283 4,020 1,660
Operating leases 871 579 289 3
Convertible notes payable (US$35 m) 40,934 -- 40,934 --
Other purchase obligations 5,439 5,439 -- --
------------------------------------------------------------------------------------
$93,635 $30,725 $58,580 $ 4,330
====================================================================================
There are no payments due after five years.
* As previously noted, this credit facility can, at the Company's option, be
repaid by issuing US$13,500 of convertible notes on or before June 30, 2006.
Related Party Transactions
The Company engaged Louis J. Fox in November 1999 to provide services in
connection with the negotiation of palladium end-user supply contracts, project
capital financing, smelting and refining agreements, metals price forecasting
and marketing other metals. The services agreement was negotiated at arms-length
prior to Mr. Fox becoming a director of the Company. The Palladium Sales
Contract expired on June 30, 2005 and no further fees were payable to Mr. Fox in
connection with this contract after this date. In the first quarter of 2005, Mr.
Fox received $121,000 under this contract.
In December 2001, KFOC provided a US$20,000,000 non-revolving credit
facility to finance the Company's working capital requirements. In the second
quarter of 2004, the KFOC credit facility was extended to June 30, 2006.
Interest is based on the 30-day LIBOR plus 2.50% and the stand-by fee is 0.125%
per annum. The amount paid to KFOC for interest and standby fee in the first
quarter of 2006 was $277,000 ($172,000 for the comparable period in 2005). KFOC
holds approximately 50% of the common shares of the Company.
-9-
On March 29, 2006, KFOC was one of two purchasers of the Series 1
convertible notes issued by the Company. KFOC subscribed for 50% of the notes
and attached warrants issued by the Company, paying US$17,500,000 of gross
proceeds to the Company.
Management's Outlook
There is no apparent pattern of variability or seasonality affecting the
Company's operations. The principal drivers of the Company's performance are its
monthly production of PGM and by-product metals from its Lac des Iles mine and
the corresponding world spot prices of such metals.
During the first quarter of 2006, North American Palladium completed the
development of the underground mine, by achieving commercial production in March
2006. With the underground mine commencing commercial production in April, it is
now expected to provide 2,000 tonnes per day, which will be combined with the
expected open pit production of 13,000 tonnes per day. Despite the operating
issues and the lower than expected performance for the first quarter, palladium
production in 2006 is expected to improve as the average head grade returns to
historical levels with the blending of the underground and open pit ores. With
the expected improvement in head grade and improved mill performance, palladium
cash costs per ounce should be significantly lower in 2006 than that experienced
in 2005.
The Company's aggressive exploration program will continue in 2006, with
approximately $15.0 million being allocated to exploration activities. The main
focus will be on the APP in Finland. Drilling commenced in late February with
the drilling results to be incorporated into a re-scoping study which has
commenced. The Company will focus on the further definition of the Offset High
Grade Zone at Lac des Iles and grassroots projects such as the Shebandowan
project. In addition, the pursuit of quality Ni/PGM opportunities will continue
to be a key strategy.
The PGM markets continue to benefit from strong global fundamentals. The
Company believes that these fundamentals will lead to increased metal demand,
and continued strength in palladium prices.
Critical Accounting Estimates
Critical accounting estimates represent estimates that are highly uncertain
and for which changes in those estimates could materially impact the Company's
financial statements. The following accounting estimates are critical:
(a) Impairment assessments of long-lived assets
Each year, the Company reviews the mining plan for the remaining life of
mine. Significant changes in the mine plan can occur as a result of mining
experience, new discoveries, changes in mining methods and rates, process
changes, investments in new equipment and technology, metal prices and other
factors. Based on year-end mineral reserves and the current mine plan, the
Company reviews annually its accounting estimates and makes adjustments
accordingly.
-10-
The Company assesses long-lived assets for recoverability whenever events
or changes in circumstances indicates their carrying values may not be
recoverable. When the carrying value of a long-lived asset is less than its net
recoverable value as determined on an undiscounted basis, an impairment loss is
recognized to the extent that its fair value, measured as the discounted cash
flows over the life of the asset.
Assumptions underlying future cash flow estimates are subject to risk and
uncertainty. Any differences between significant assumptions and market
conditions such as metal prices, exchange rates, recoverable metal, and/or the
Company's operating performance could have a material effect on the Company's
ability to recover the carrying amounts of its long-lived assets resulting in
possible additional impairment changes.
(b) Amortization of mining interests
The Company amortizes a large portion of its mining interests using the
unit of production method based on proven and probable reserves. As a result of
the asset impairment charge recorded in 2004, the unit of production
amortization rate in 2005 reduced by approximately 49%. Changes in reserve
estimates are calculated periodically and could affect amortization expense
prospectively.
(c) Forward Metal Sales and Metal Price Swap Contracts
North American Palladium has in place a hedge policy to allow for managing
the Company's exposure to market metal prices, particularly its platinum, gold,
nickel and copper price exposure. North American Palladium uses fixed-price
forward platinum sales contracts and cash settled gold, nickel and copper price
swap contracts to insulate its earnings and cash flows from changes in these
metal prices. These contracts allow the Company to sell its platinum to
credit-worthy metal dealers at a fixed price under the forward sales contract.
In the case of gold, nickel and copper, the Company receives a fixed metal price
in exchange for paying the floating price received under its physical sales
contracts to acceptable counterparts under the metal price swap contracts. In
October 2005, the Company made a decision to unwind various by-product metal
hedges namely, platinum, gold, and nickel through the buy-back of forward sales
or cash settled metal price swaps. This decision was taken to reposition the
Company's exposure to its by-product metals in advance of the expected increase
in metal production at Lac des Iles in 2006. As at March 31, 2006, the Company
does not have any forward sales or metal swap contracts in place.
Non-GAAP Measure
North American Palladium has included in this document a non-GAAP
performance measure for cash cost per ounce. This non-GAAP measure does not have
any standardized meaning nor is it necessarily comparable with similar measures
presented by other companies. North American Palladium believes that certain
investors use this information to evaluate the Company's performance. This data
is intended to provide additional information and should not be considered in
isolation or as a substitute for measures of performance prepared in accordance
with GAAP. The Company receives U.S. dollars
-11-
from the sale of its metal production, with its production costs being
principally in Canadian dollars. The strengthening of the Canadian dollar in
relation to the U.S. dollar will have a negative impact on the Company's cash
cost per ounce as calculated in U.S. dollars.
Reconciliation of Cash Cost per Ounce to Financial Statements
Three Months Ended March 31
--------------------------------------------------------------------------------
(thousands of dollars except per ounce amounts) 2006 2005
--------------------------------------------------------------------------------
Production costs including overhead $ 24,311 $ 23,233
Smelter treatment, refining and freight costs 2,714 4,673
--------------------------------------------------------------------------------
27,025 27,906
--------------------------------------------------------------------------------
Less: by-product metal revenue (14,717) (14,010)
--------------------------------------------------------------------------------
12,308 13,896
--------------------------------------------------------------------------------
Divided by ounces of palladium 32,057 45,354
--------------------------------------------------------------------------------
Cash cost per ounce (C$) 384 306
--------------------------------------------------------------------------------
C$ exchange rate 1.1671 1.2097
--------------------------------------------------------------------------------
Cash cost per ounce (US$) 329 253
--------------------------------------------------------------------------------
Other Information
Additional information regarding the Company is included in the Company's
Annual Information Form and Annual Report on Form 40-F which are filed with the
Canadian securities regulators and the United States Securities and Exchange
Commission, respectively. A copy of the Company's Annual Information Form is
posted on the SEDAR website at www.sedar.com. A copy of the Annual Report or
Form 40-F can be obtained from the United States Securities and Exchange
Commission's website at www.sec.gov.
Outstanding Share Data
The following securities are outstanding as of May 5, 2006:
(i) 52,340,873 common shares of the Company outstanding;
(ii) stock options outstanding pursuant to the 1995 Corporate Stock Option
Plan entitling the holders to acquire 446,384 common shares of the
Company at an average strike price of $8.60;
(iii) US$35 million principal amount of convertible notes (the "Series 1
Notes") outstanding;
(iv) common share purchase warrants which can be exercised to purchase
1,436,782 common shares at US$13.48 until March 29, 2010;
(v) unit warrants which can be exercised to purchase up to US$10 million
principal amount of convertible notes (the "Series 3 Notes").
-12-
The Series 1 Notes can be converted into common shares of the Company at
US$12.18 (2,873,563 common shares). The Series 1 Notes bear interest at a rate
of 6.5% per annum payable bi-monthly, commencing on June 1, 2006. The Series 1
Notes are repayable in nine equal installments commencing on June 1, 2007. The
interest payments and/or repayment amounts may be paid to each purchaser, at
such purchaser's option, in any combination of cash and/or common shares. Common
shares issued for interest payments or in repayment of Series 1 Notes will be
issued at a 10% discount from the weighted average trading price of the common
shares on the American Stock Exchange for the five consecutive trading days
immediately prior to applicable payment date.
The Series 3 Notes, if issued, will have the same terms as the Series 1 Notes
except that the interest payments will commence on the first interest payment
date after the issuance of such note and the principal repayments will commence
on the first interest payment that is at least twelve months after the date of
issuance of such note.
Risks and Uncertainties
The price of palladium is the most significant factor influencing the
profitability of the Company. Currently, sales of palladium account for
approximately 50% of the Company's revenue. Many factors influence the price of
palladium, including global supply and demand, speculative activities,
international political and economic conditions and production levels and costs
in other PGM producing countries, particularly Russia and South Africa. The
possible development of a substitute alloy or synthetic material, which has
catalytic characteristics similar to platinum group metals, may result in a
future decrease in demand for palladium and platinum.
Currency fluctuations may affect cash flow since production currently is
sold in United States dollars, whereas the Company's administration, operating
and exploration expenses are incurred in Canadian dollars. As a result, changes
in the exchange rate between Canadian and United States dollars can affect
revenue and profitability.
The Company is dependent on one mine for its metal production. The business
of mining is generally subject to risks and hazards, including environmental
hazards, industrial accidents, metallurgical and other processing problems,
unusual and unexpected rock formations, pit slope failures, flooding and
periodic interruptions due to inclement weather conditions or other acts of
nature, mechanical equipment and facility performance problems and the
availability of materials and equipment. These risks could result in damage to,
or destruction of, the Company's properties or production facilities, personal
injury or death, environmental damage, delays in mining, monetary losses and
possible legal liability. Although the Company maintains insurance in respect of
the mining operations that is within ranges of coverage consistent with industry
practice, such insurance may not provide coverage of all the risks associated
with mining. Currently the Company sells all of its concentrate to one smelting
firm under a contract that expires on September 30, 2006. Management believes it
will be successful in negotiating an extension and/or new agreement with the
smelting firm, but cannot guarantee that this will occur.
-13-
EXHIBIT 2
North American Palladium Ltd.
Consolidated Balance Sheets
(expressed in thousands of Canadian dollars)
March 31 December 31
2006 2005
--------- -----------
(unaudited)
Assets
Current Assets
Cash and cash equivalents $ 36,290 $ 15,031
Concentrate awaiting settlement, net - Note 2 49,492 37,453
Inventories 9,864 8,599
Crushed and broken ore stockpiles - Note 3 6,553 7,267
Other assets 2,077 2,344
--------- ---------
104,276 70,694
Mining interests, net 161,873 159,523
Mine restoration deposit - Note 4 7,547 7,247
Crushed and broken ore stockpiles - Note 3 369 239
Deferred financing costs 1,316 654
--------- ---------
$ 275,381 $ 238,357
--------- ---------
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable and accrued liabilities $ 17,411 $ 16,392
Taxes payable 357 386
Future mining tax liability 123 --
Current portion of obligations under capital leases 2,283 2,323
Current portion of long-term debt - Note 5 6,668 6,664
Kaiser Francis credit facility - Note 5 15,756 13,407
--------- ---------
42,598 39,172
Mine restoration obligation 7,974 7,894
Obligations under capital leases 5,680 6,218
Long-term debt - Note 5 16,004 17,660
Convertible notes payable -Note 6 22,490 --
Future mining tax liability 311 202
--------- ---------
95,057 71,146
Shareholders' Equity
Common share capital and common share purchase warrants-
Note 7 331,314 325,592
Equity component of convertible notes payable, net of issue
costs - Note 6 11,388 --
Contributed surplus 1,018 874
Deficit (163,396) (159,255)
--------- ---------
Total shareholders' equity 180,324 167,211
--------- ---------
$ 275,381 $ 238,357
--------- ---------
Page 14
North American Palladium Ltd.
Consolidated Statements of Operations and Deficit
(expressed in thousands of Canadian dollars, except share and per share amounts)
(unaudited)
Three months
ended
March 31
2006 2005
------------ ------------
Revenue from metal sales - Note 9 $ 31,492 $ 26,206
------------ ------------
Operating expenses
Production costs, excluding amortization
and asset retirement costs 24,311 23,233
Smelter treatment, refining and freight costs 2,714 4,673
Amortization 3,608 4,729
Administrative 2,179 1,595
Exploration expense 2,024 843
Asset retirement costs 123 124
------------ ------------
Total operating expenses 34,959 35,197
------------ ------------
Loss from mining operations 3,467 8,991
------------ ------------
Other expenses (income)
Interest on long-term debt 695 635
Foreign exchange loss (gain) 281 64
Interest income (83) (489)
Write-off of deferred financing costs 504 --
------------ ------------
Total other expenses (income) 1,397 210
------------ ------------
Loss before income taxes 4,864 9,201
Income tax expense (recovery) (723) (1,465)
------------ ------------
Net loss for the period 4,141 7,736
Deficit, beginning of period 159,255 105,644
------------ ------------
Deficit, end of period $ 163,396 $ 113,380
------------ ------------
Net loss per share
Basic $ 0.08 $ 0.15
------------ ------------
Diluted $ 0.08 $ 0.15
------------ ------------
Weighted average number of shares outstanding
Basic 52,214,834 51,741,396
------------ ------------
Diluted 52,214,834 51,741,396
------------ ------------
Page 15
North American Palladium Ltd.
Consolidated Statements of Cash Flows
(expressed in thousands of Canadian dollars)
(unaudited)
Three months
ended
March 31
2006 2005
-------- --------
Cash provided by (used in)
Operations
Net income (loss) for the period $ (4,141) $ (7,736)
Operating items not involving cash
Future income tax expense (recovery) (835) (1,685)
Amortization 3,608 4,729
Unrealized foreign exchange gain (loss) (46) 191
Asset retirement costs 123 124
Write-off of deferred financing costs 504 --
Stock based compensation and employee benefits 425 414
-------- --------
(362) (3,963)
Changes in non-cash working capital - Note 8 (10,082) 14,873
-------- --------
(10,444) 10,910
-------- --------
Financing Activities
Repayment of long-term debt (1,670) (1,724)
Issuance of convertible notes - Note 6 41,037 --
Increase in long term debt and credit facility 2,311 --
Deferred financing costs (2,137) --
Issuance of common shares 475 431
Mine restoration deposit (300) (300)
Repayment of obligations under capital leases (578) (457)
-------- --------
39,138 (2,050)
-------- --------
Investing Activities
Additions to mining interests - Note 8(b) (7,435) (6,069)
-------- --------
Increase in cash and cash equivalents 21,259 2,791
Cash and cash equivalents, beginning of period 15,031 65,755
-------- --------
Cash and cash equivalents, end of period $ 36,290 $ 68,546
-------- --------
Page 16
North American Palladium Ltd.
Notes to the Consolidated Financial Statements
For the three months ended March 31, 2006
(expressed in thousands of Canadian dollars except per share and
per ounce amounts)
(unaudited)
1. Basis of Presentation
These unaudited consolidated financial statements have been prepared using
disclosure standards appropriate for interim financial statements and do
not contain all the explanatory notes, descriptions of accounting policies
or other disclosures required by Canadian generally accepted accounting
principles for annual financial statements. Such notes, descriptions of
accounting policies and other disclosures are included in the Company's
audited annual consolidated financial statements included in the Company's
annual report to shareholders for the year ended December 31, 2005.
Accordingly, these consolidated financial statements should be read in
conjunction with the audited annual consolidated financial statements for
2005.
2. Concentrate Awaiting Settlement
The gross value of concentrate awaiting settlement represents the value of
platinum group metals and base metals from production shipped to and
received by the third-party smelters between August 2005 and March 2006,
which are in-process at the balance sheet date. At March 31, 2006,
concentrate awaiting settlement included 72,624 ounces of palladium
(December 31, 2005 - 65,905) of which 9,004 ounces is pre-production from
the underground mine which is not recognized as revenue. Concentrate
awaiting settlement is revalued and adjusted at each reporting period to
reflect the changes in metal prices and foreign exchange rates. Concentrate
awaiting settlement was entirely from two domestic customers at March 31,
2006 and December 31, 2005 and the Company expects full realization will
occur on all such receivables.
3. Crushed and Broken Ore Stockpiles
Crushed and broken ore stockpiles are valued at the lower of average
production cost and estimated net realizable value. Crushed and broken ore
stockpiles represent coarse ore that has been extracted from the mine and
is available for further processing. The amount of stockpiled ore that is
not expected to be processed within one year is shown as a long-term asset.
4. Mine Restoration Deposit
The Company has established a mine closure plan for the eventual clean-up
and restoration of the mine site in conjunction with the Ontario Ministry
of Northern Development and Mines (the "Ministry"), which requires a total
amount of $7,802 to be accumulated in a Trust Fund controlled by the
Ministry. At March 31, 2006, the Company had $7,547 on deposit with the
Ministry and has agreed to make monthly deposits of $100. The funds on
deposit bear interest at current short-term deposit rates and will be
returned to the Company once the mine closure is completed.
5. Credit Facility and Long-Term Debt
The Company's credit facility and long-term debt, is comprised of a senior
credit facility with an equipment finance company and a credit facility
with Kaiser-Francis Oil Company ("KFOC"), the Company's controlling
shareholder. The interest rate under both loan facilities is LIBOR plus 250
basis points, or 7.31% at March 31, 2006. As at March 31, 2006, the
outstanding long-term debt, including current and long-term portions was
$38,428 ($37,731 at December 31, 2005). The senior credit facility is
Page 17
repayable in equal quarterly installments over a five-year period with a
final maturity of November 24, 2009. The Kaiser-Francis credit facility
outstanding as at March 31, 2006 was US$13,500 (US$11,500 as at December
31, 2005) and matures on June 30, 2006 (also refer to Note 6).
6. Convertible Notes
On March 29, 2006, the Company issued US$35,000 aggregate principal amount
of Series 1 convertible notes (the "Notes") due August 1, 2008 through a
private placement of convertible notes and common share purchase warrants.
The Offering (the "Offering") consists of up to US$ 58,500 principal amount
of Notes. The Offering is to KFOC and an institutional investor (the
"Purchasers"). The Offering is governed by a securities purchase agreement
dated March 24, 2006 (the "SPA") among the Corporation and the Purchasers.
Under the terms of the SPA, the Corporation issued on March 29, 2006
US$35,000 principal amount of Notes (the "First Tranche"), 50% to each of
the Purchasers.
The First Tranche of Notes is convertible into 2,873,563 common shares of
the Corporation (the "Common Shares") at any time by the holder at US$12.18
per share. Warrants exercisable to purchase 1,436,782 Common Shares were
issued with the Notes, each Warrant being exercisable to purchase one
Common Share at an exercise price of US$13.48 until March 29, 2010.
The Notes bear interest at a rate of 6.5% per annum payable bi-monthly,
commencing on June 1, 2006. Each Note is repayable in nine equal
installments commencing on the first interest payment date that is at least
twelve months after the date of issuance of such Note (June 1, 2007 for the
First Tranche). The interest payments and/or repayment amounts may be paid
to each Purchaser, at such Purchaser's option, in any combination of cash
and/or Common Shares. Common Shares issued for interest payments or in
repayment of Notes will be issued at a 10% discount from the weighted
average trading price of the Common Shares on the AMEX for the five
consecutive trading days immediately prior to applicable payment date.
The Corporation, at its option, has the right to sell to KFOC up to
US$13,500 principal amount of Notes (the "Second Tranche") on or before
June 30, 2006, the proceeds of which will be used to repay the loan under
the existing KFOC standby loan facility (refer to note 5). KFOC has granted
the other purchaser an option to acquire up to 50% on the Second Tranche.
The Purchasers will have the option to acquire an additional US$10,000
principal amount of Notes (the Third Tranche") on or before December 31,
2006, with each Purchaser entitled to acquire one-half. If either Purchaser
does not acquire its entire allotment of the additional US$10,000 in Notes,
the other Purchaser may purchase the balance.
Commencing 15 months after the date of issuance of each tranche of Notes
(June 29, 2007 for the First Tranche), if the weighted average trading
price of the Common Shares for each of any 25 consecutive trading days is
150% of the Conversion Price, the Corporation will have the right to force
the Purchasers to convert all or any of the outstanding principal amount of
the Notes at the Conversion Price.
The Notes contain customary covenants, including restrictions on the
Corporation incurring debt or obligations for or involving the payment of
money in excess of certain restricted amounts. The Notes are unsecured but
will contain customary anti-dilution protection as well as adjustments in
the event that the Corporation issues Common Shares or securities
convertible into Common Shares at a purchase price per Common Share less
than the Conversion Price. The Warrants will contain similar anti-dilution
protection.
Page 18
Under Canadian GAAP, the components of the convertible notes must be
bifurcated and accounted for separately as debt and equity instruments. The
warrants are separable from the Notes and are accounted for as an equity
instrument. The proceeds received were allocated to the debt and equity
components of the Notes and to the initial warrants on a relative fair
value basis as follows: US$19,270 to the debt, US$10,246 to the equity
component and US$5,484 to the warrants. The Company will be required to
accrete the carrying value of the Notes such that at each installment
payment date, the carrying value of the Notes will be equal to their face
value.
The fair value of the debt was determined based on the future payments of
principal and interest for a debt instrument of comparable maturity and
credit quality, excluding any conversion option by the holder. The Notes
carry an effective interest of 46.7%. The conversion option or equity
component of the Notes was valued using a Binomial model. The fair value of
the warrants was determined based on the Black-Scholes option pricing
model. The models used in the valuation of the components of the
convertible debt contain certain subjective assumptions, changes of which
can cause significant variation in the estimated fair value of the debt and
equity components of the Notes.
The estimated issue costs of C$2,137 have been allocated pro-rata to the
debt and equity components of the Notes and to the initial warrants on a
relative fair value basis. The financing costs related to the debt
component will be amortized on an effective yield basis over the 30 month
term of the convertible notes.
7. Common Share Capital and Common Share Purchase Warrants
The authorized capital stock of the Company consists of an unlimited number
of common shares and an unlimited number of special shares, issuable in
series, including 10,000,000 Series A preferred shares.
(a) Common shares and common share purchase warrants:
March 31, 2006
Shares Amount
-------------------------
Common shares issued, beginning of period 52,197,217 $ 325,592
Common shares issued:
Pursuant to stock options exercised 47,054 475
Fair value of stock options exercised -- 26
To group registered retirement savings
plan participants 19,032 193
Tax effect of flow-through shares -- (1,067)
------------------------
Common shares issued, end of period 52,263,303 325,219
Common share purchase warrants
Balance, beginning of period -- --
Issued pursuant to terms of Series 1
convertible notes, net of issue costs 1,436,782 6,095
------------------------
Balance, end of period 1,436,782 6,095
------------------------
$ 331,314
---------
Page 19
At March 31, 2006, the Company had 498,084 stock options outstanding at a
weighted-average exercise price of $9.11, expiring at various dates from
June 6, 2006 to December 14, 2013. No stock options were granted in the
first quarter of 2006 or the first quarter of 2005. The Company recognized
a stock based compensation expense of $176 for the three months ended March
31, 2006 (March 31, 2005 - $178).
The Company finances a portion of its exploration activities through the
issue of flow through shares. Under the terms of these share issues, the
tax attributes of the related expenditures are renounced to subscribers. At
the time the Company renounces the tax attributes of the expenditures to
the subscribers, share capital is reduced and future tax liabilities are
increased by the estimated income tax benefits renounced.
(b) Common Share Purchase Warrants
Pursuant to the terms of the securities purchase agreement governing the
issue of the convertible notes, warrants to purchase 1,436,782 common
shares were issued and are outstanding, with each warrant being exercisable
to purchase one Common Share at an exercise price of US$13.48 until March
29, 2010 (refer to note 6).
(c) Restricted Share Unit Plan
Effective December 14, 2005, the Company adopted a Restricted Share Unit
Plan under which eligible directors, officers and key employees of the
Company are entitled to receive awards of restricted share units. Each
restricted share unit means an equivalent in value to the fair market value
of a common share of the Company on the date of the award. As at March 31,
2006, 25,000 restricted share units have been granted and are outstanding.
The fair value of the restricted share units as at March 31, 2006 is $13.68
per unit and $57 has been charged to compensation expense for the three
months ended March 31, 2006.
8. Changes in Non-Cash Working Capital
Three Months
ended
March 31
2006 2005
----------------------
Cash provided by (used in):
Concentrate awaiting settlement $(12,039) $ 17,346
Inventories and stockpiles 763 (722)
Other assets 267 376
Accounts payable and accrued liabilities 956 (2,011)
Taxes payable (29) (116)
----------------------
$(10,082) $ 14,873
----------------------
(b) During the three months ended March 31, 2006, mining interests were
acquired at an aggregate cost of $7,435 (March 31, 2005 - $7,507) of which
$nil (March 31, 2005 - $1,438) were acquired by means of capital lease.
Page 20
9. Revenue from Metal Sales
Three Months
ended
March 31
2006 2005
-----------------------
Palladium $12,346 $11,870
Adjustments for mark-to-market 4,429 326
Nickel 4,689 4,886
Platinum 5,169 4,826
Gold 1,991 1,818
Copper 2,654 1,986
Other metals 214 494
-----------------------
$31,492 $26,206
-----------------------
10. Commitments
The Company enters into forward contracts from time to time to hedge the
effects of changes in the prices of metals it produces and foreign exchange
on the Company's revenues. Gains and losses realized on derivative
financial instruments used to mitigate metal price risk are recognized in
revenue from metal sales when the hedge transaction occurs.
11. Comparative Period Figures
Certain prior period amounts have been reclassified to conform to the
classification adopted in the current period.
Page 21
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NORTH AMERICAN PALLADIUM LTD.
130 ADELAIDE STREET WEST, SUITE 2116
TORONTO, ONTARIO, CANADA M5H 3P5
T. 416.360.7590 F. 416.360.7709
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