North American Palladium Ltd (New) PALDF

Macquarie: Underperform rating and $0.35 target for PDL

[hockeyguy123]

According to Macquarie Research:

https://app.box.com/s/v7k7cccxlmrwxqxztxdp

North American Palladium

Operationally fine in 1Q, but dilution weighs

Event

- Timing of sales impacts 1Q results. North American Palladium (PDL) reported 1Q14 results including adjusted EPS of ($0.06) and CFPS of $0.04, compared to consensus expectations of ($0.02) and ($0.01) respectively. Sales of 39.5koz of palladium contributed to revenue of $48.7m in the quarter. Sales were slightly below our forecast and reflect a build up of concentrate inventory, which is expected to be drawn down in 2Q. Production costs of $29.7m were flat QoQ.

- PDL finished 1Q with $22m in cash and $257m in debt and subsequent to quarter end completed its Tranche 2 convertible debt financing for gross proceeds of $35m. Approximately $27.4m of the second tranche has already been converted into 88.1m new shares.

Impact

- Operationally the results from 1Q were good. The ramp up at the shaft appears to be progressing well, with the targeted 5ktpd operating rate expected to be reached in 4Q. The recovery rate at the mill improved QoQ to 84.5%, which is likely sustainable as higher grade ore is expected to feed the mill as production from the shaft ramps up.

- Dilution risk realized. On the balance sheet, we recognize that the completion of the convertible debt financing relieves the near term pressure to fund working capital. That said, the conversion into equity increases the share count from a weighted average of 232.9m in 1Q to 362.8m shares as of 30 April. We note that the share count has more than doubled since the end of 1Q13.

Earnings and target price revision

- Dilution impacts NAV and financial estimates, target reduced. By incorporating the results from the quarter, the revised share count and the updated mine plan released in March, our NAV falls to $0.75 from $1.52/sh previously. Similarly our EPS and CFPS estimates also fall for the same reasons. While securing financing was necessary to maintain sufficient liquidity to continue day-to-day operations, the convertible debt has significantly diluted previous equity holders. We are reducing our target price to $0.35 from $0.50 on the lower NAV.

Price catalyst

- 12-month price target: C$0.35 based on a discount to NAV methodology.

- Catalyst: Continued strength in the palladium price. Securing capital for longer term development. Changes to capital structure.

Action and recommendation

- We maintain our Underperform rating. We are encouraged by the operational developments at the Lac des Iles mine and by the progress being made on ramping up the shaft. However, the capital structure remains a concern and drives our Underperform rating on the stock.