North American Palladium emphasizes performance at LDI

North American Palladium (TSX: PDL; US-OTC: PALDF) has let go 44 workers at its Lac des Îles (LDI) palladium mine near Thunder Bay, Ont., due to weaker metal prices and a reduced milling schedule.

While the move was unfortunate, it was part of the company’s efforts to drive down operating costs, PDL’s new president and CEO Jim Gallagher says in an interview.

Affected employees include 18 staff and 26 unionized members. The company will leave another 17 positions vacant, resulting in 61 fewer positions. After the scale-back, the LDI mine will employ 422 workers.

Other cost-saving initiatives include PDL’s move to stop blending low-grade surface stockpile with the mine’s higher-grade underground ore. Processing the stockpile, which grades less than 1 gram per tonne palladium, is not economic at current metal prices, Gallagher says.

When the miner announced the job cuts on Sept. 30, the palladium spot price was trading at US$651 per oz., down 18% year-to-date. (The price rose two days later to US$698 per oz.)

The underground mine will run as is, Gallagher says, explaining there’s not enough feed to keep the mill running. “We do have a large mill. Its nameplate capacity is 15,000 tonnes a day, and we are producing 4,500 tonnes a day from underground. Without the supplemental low-grade stockpile, we simply cannot run the mill full-time.”

As a result, the mill will return to a 14-day on and 14-day off schedule. Planned throughput should average 1,340 tonnes per day when in operation. 

Since the schedule change and temporary mill shutdown in the second quarter, PDL has lowered its 2015 production guidance. It expects to produce 160,000 to 170,000 oz. palladium, compared to the previous estimate of 185,000 to 205,000 oz. 

The junior announced in late July that it was reviewing its guidance and anticipated an adverse outcome after the mill was suspended for six weeks in May and June, due to high water levels in the containment ponds. This was resolved by control-releasing water into the environment in June.

But this took a toll on production, revenues and earnings. PDL posted a net $97-million loss in the June quarter, compared to a $10-million loss in the same period last year.

The cash-strapped firm kept going with a US$25-million bridge loan from Brookfield Capital Partners Ltd. in June, as the miner agreed to a proposed financial restructuring.

Under the restructuring, completed on Aug. 6, PDL converted the outstanding loans it owed Brookfield, minus the bridge loan, into equity representing 92% of its outstanding shares.

It also converted its 2012 and 2014 convertible debentures into equity, giving the debenture holders 6% of the company. PDL shareholders kept 2% of the firm. (Afterwards the miner underwent a 1-to-400 share consolidation.)

It also consolidated its corporate roles. On Aug. 12, Gallagher, formerly the chief operating officer, took over the president and CEO roles from Phil du Toit, who resigned. Corporate controller Christine Napierala became interim vice-president of finance and chief financial officer, after David Langille stepped down.

“We streamlined the operations at the corporate level. We will be downsizing our office space in the near future. So we’re saving between $2 million and $2.5 million a year, with the head office reductions,” Gallagher says.

Gallagher, Napierala and David Peck, the company’s vice-president of exploration, now make up PDL’s management team.

To inject more capital into the miner, PDL completed a $50-million rights offering in September. It will use the funds to repay the US$25-million bridge loan and continue working on the LDI mine.

“It’s really about having a laser-like focus on operational performance and long-term success,” Gallagher says. While most companies are reining in their exploration and capital programs, PDL, with the support of Brookfield, is investing in the LDI mine and exploration. “In fact, we are ramping up both our underground and our surface greenfield property exploration. And we continue to invest capital for the long-term sustainability of the current mine operations.”

PDL’s exploration budget for 2015 is just under $10 million. It has four drills turning, including two underground at the LDI mine.

The company will invest heavily into the mine as well as exploration in the next two years, Gallagher says, highlighting his bullish stance on palladium.

“Despite recent dynamics in the commodities market, including palladium, we certainly believe in the long-term story for palladium, and most investors are still bullish on palladium. It has actually been one of the better performers in the recent turmoil. We are committed to our long-term story here, and I think that’s what people have to be looking for.”

In the near-term, investors should keep an eye on the company’s cash flow, with Gallagher expecting positive operating cash flow by year-end. “We will actually be there in December, and we will be in that position throughout 2016.”


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