North American Palladium (PDL-T, PAL-N), or NAP, secured some much-needed cash to keep expanding its Lac des Iles (LDI) primary palladium mine near Thunder Bay, Ont.
The company, following a weak first quarter that indicated cost overruns at LDI and lower output, provided some relief to investors by accessing capital to fuel the mine’s underground expansion, where it is shifting to mining using a shaft instead of a ramp.
The first expansion phase, set to wrap up in late September, should boost underground mining rates to 3,500 tonnes per day, pushing annual production close to 180,000 oz. palladium a year, or adding 40,000 oz. palladium per year.
To keep its growth plan on track, NAP is raising US$130 million in debt and $20 million in flow-through shares.
The four-year loan, provided by Brookfield Capital Partners, has an annual interest rate of 15% and expires on June 7, 2017. Most of the proceeds will be used to repay the $72-million loan with Sprott due Oct. 4, 2014, as well as redemption penalties, estimated at 10% of principal, notes Raymond James analyst Alex Terentiew.
He points out the debt financing replaces Sprott as the primary lender, extends the loan maturity date by three years and bolsters the company’s dwindling cash position.
The Toronto-based producer also has an option to defer paying interest on the loan during the first two years. However, if it chooses to do that the interest rate would increase to 19% per year, both during and after the accrual period.
CIBC analyst Leon Esterhuizen comments that while the debt provides instant cash relief, it is expensive and lifts the company’s total debt load to $180 million, excluding a $60-million revolving facility, which NAP has maxed out and extended by another year to July 4, 2014.
To improve its liquidity, the miner intends to complete a $20-million non-brokered private placement in two tranches over the next two months, anticipated to occur around June 19 and July 23.
Together the debt and equity financings should provide $65 million in net proceeds, which should be enough to complete the first expansion phase, says Camilla Bartosiewicz, NAP’s director of investor relations.
In May, NAP said a preliminary review of the mine suggested cost overruns of up to 35% over the prior guidance of $105 million to finish the first phase and start the next phase of shaft sinking.
Bartosiewicz says the company will finalize that amount once it completes the review, expected in the third quarter, and is looking at ways to bring down costs.
But both analysts believe the company will need more funds than previously estimated for the second phase, with Esterhuizen suggesting that NAP may take a year longer, or until 2016, to finish that phase.
NAP hasn’t released any long-term capital guidance for the mine, but envisions increasing mining rates to 5,500 tonnes per day in the second phase to deliver 250,000 oz. palladium per year by 2015. Cash costs are anticipated to decline to US$300 per oz., net of by-product credits.
The company closed June 10 up nearly 5% at $1.13, after losing almost 8% on the financing news, which was released on June 7.