When the global economic crisis took hold, the price of palladium plummeted, leaving newly arrived president and CEO Bill Biggar with a tough decision regarding the fate of North American Palladium Ltd. Two years later he tells Andrew Pelis about the company’s rapidly changing status.
Sometimes in business it’s necessary to take painful decisions that seem like a step backward but are taken for the development of a company. Such was the task that greeted Bill Biggar when he became president and chief executive officer at North American Palladium Ltd. (NAP).
It’s fair to say that the timing of Biggar’s appointment wasn’t great—October 2008, just as the global economic crisis began to bite and the price of palladium began to tumble.
Biggar was faced with a tough decision to lay off some 400 miners and place the company’s sole mining asset at Lac des Iles, Ontario, under care and maintenance for the foreseeable future.
Two years later, the Toronto-based company has emerged from its dormant period a stronger, more focused, well-organized entity—with a mine expansion underway and on the crest of the soaring palladium market. NAP is in transition, becoming a long life, low cost producer with a renewed focus on exploration.
“We’re one of only two primary palladium mines in the world,” Biggar states, “and our Lac des Iles (LDI) mine remains our flagship project. One of our strengths as seasoned operators, and with fully permitted, under-utilized facilities, is that the execution risk behind our mine expansion project is significantly reduced, and we can move from exploration success to production and cash flow on an accelerated timeline. This gives investors significant leverage, particularly in a period of rising palladium prices.”
The care and maintenance period lasted over a year, but as Biggar explains, this was far from an inactive period for NAP. “The story goes back to 1993 when we began production of palladium in an open-pit mine, which is now exhausted,” says Biggar. “This was expanded in 2001, when a new mill was also built to process ore. Further expansion took place in 2006 when the company commenced underground operations. In October 2008 when we suspended operations, palladium prices had dropped from $400 per ounce to under $200, which was considerably less than our production costs. We therefore set about exploring ways to optimize production, and we paid retention bonuses to all our senior management team so that when we were ready to resume production we could do so quickly.
“At the same time,” Biggar continues, “we felt we needed to change the culture of the company, as our focus had mostly been as an operator to that point. We had begun underground operations in 2006 in the Roby Zone, but there was limited drilling below in what we labelled the Offset Zone. So while on care and maintenance, we made a significant investment in extensional drilling to position NAP for future production.
“We had good exploration success in 2009, but I think we have only begun to show our potential. We doubled our exploration budget in 2010 and now have 19 geologists on staff focused on drilling the Offset Zone, which we now know goes down to a depth of at least 1,300 meters while it still remains open in all directions.” While on care and maintenance, NAP’s geologists also discovered two new zones, the Cowboy and the Outlaw zones, which could further extend LDI’s mine life beyond its current forecast of 10 years.
NAP’s superb rock conditions at the mine are conducive to the “super shrinkage” mining method for the Offset Zone, which will make NAP a very low cost producer of palladium while allowing the company to almost double its production to over 250,000 ounces per year. The company intends to raisebore a shaft to surface, and subsequently sink it to the bottom. The development work for the mine expansion is now well under way, and Biggar expects that the shaft will be fully operational by the third quarter of 2012, around the same time that the Roby Zone ore is scheduled to run out.
The LDI mine officially recommenced production in April 2010, in a very different price environment. The cost of palladium rose above $500 per ounce, making production cost-effective again.
“The new method of mining for the Offset Zone will help us achieve our goal of becoming a low-cost producer of palladium as we are aiming to achieve a target of $130 per ounce cash cost,” Biggar says. “In mining, there are a lot of variables such as the price of metals and exchange rates that are beyond our control, so all we can do is focus on what is within our control—which is our cash costs. And I do believe that that we’re in a very good point in the palladium price cycle, which offers exciting potential.”
That potential is fueled by the global drive to reduce automotive emissions, which has seen a surge in demand for catalytic converters at a time when automotive production in countries like China, India and across South America has soared. With so few producers of palladium, this puts availability at a premium, and therefore the price continues to rise as the commodity becomes increasingly scarce.
However, palladium is no longer the sole focus for NAP. In early 2009 the company had decided to spread its risk by acquiring gold assets, and it completed the purchase of the Sleeping Giant gold mine by buying junior mining company Cadiscor Resources Inc. “Along with the mine in the Abitibi region of Quebec, we acquired a 70-kilometer land package with a number of exploration projects within trucking distance to Sleeping Giant’s underutilized mill. Between Sleeping Giant and our other gold assets, we believe that we have significant organic growth, with the potential to produce in the range of 125,000 ounces of gold per year.”
NAP’s other gold projects are currently being scoped for development, and a mill expansion study is underway that could double the capacity of the Sleeping Giant mill, thereby allowing it to act as a regional hub for the processing of ore from NAP’s other gold assets.
NAP has been publicly listed both in New York (NYSE Amex: PAL) and Toronto (TSX: PDL) for many years. While at first glance the prospects for the company may have appeared bleak when the palladium mine went into care and maintenance, Biggar and his team were able to raise capital exceeding $175 million in just 12 months to fund their expansion plans.
The palladium mine expansion costs are reported to be approximately $270 million, but payback should be covered within three short years—with the prospect of an even faster return should palladium prices continue to rise.
As a debt-free company with lower operating costs in a buoyant marketplace, the future looks very bright for NAP, and Biggar doesn’t rule out the possibility of further gold acquisitions further afield. “We would like to eventually get our gold production up to 250,000 ounces per year, and while our immediate aim is for organic growth for the next couple of years, we’ll also keep an eye open on acquisition opportunities in mining friendly jurisdictions.”
