Citing its “strong financial outlook with capital discipline,” RBC Dominion Securities analyst Mark Mihaljevic initiated coverage of North American Palladium Ltd. (PDL-T) with an “outperform” rating, seeing its free cash flow, returns and margins “well ahead of peers.”
“We believe North American Palladium (NAP) offers investors strong financial fundamentals with the highest free cash flow yield in the North American precious metals space, amongst the highest returns on invested capital and equity in the sector, and above average margins,” said Mr. Mihaljevic in a research note released Tuesday.
“Located in Ontario, a geopolitically stable and mining-friendly jurisdiction, we believe Lac des Iles (LDI) holds the potential for future resource/reserve growth given a number of prospective targets in the company’s exploration portfolio. We also consider NAP to be uniquely positioned as the only publicly-traded pure palladium producer.”
The analyst expects “positive” financial momentum from the Toronto-based miner as it reaps the benefits of record palladium prices, while, at the same time, it delivers “modest” production growth and “steady” operating and capital costs.
Mr. Mihaljevic is projected free cash flow growth from only $10-million in 2017 to $180-million in 2019 with an average of $260-million from 2020 through 2022.
“At our forecast prices, this equates to an average free cash flow yield of 19 per cent from 2019-21E which is the highest in our North American precious metals coverage universe,” he said. “This compares to the single asset peers at 14 per cent and the broader universe at 9 per cent.”
“The company’s strong outlook also sees NAP deliver one of the highest return on invested capital in the precious metals space at 24 per cent, based on our estimates. This is well ahead of the single-asset producer average of 6 per cent and broader sector average of 6 per cent. We also see a similar trend with return of equity with the company’s ROE of 25 per cent comparing favorably to the single-asset peers at 9 per cent and sector at 7 per cent.”
Mr. Mihaljevic also emphasized that NAP is likely to benefit from the current deficit in the palladium market, which will support “strong” near-term pricing, adding: “In the near term, we remain constructive on palladium prices as we expect the current market deficit to persist through 2021. We also believe market tightness in 2018 and year-to-date 2019 has embedded a wider structural deficit as above-ground stocks have continued to be drawn down. Longer term, we are currently more cautious as we forecast an eventual re-balancing of the market as supply and demand gradually respond to current prices, with the market and value chains in vehicle OEMs eventually arbitraging out the pricing differences between palladium and platinum via substitution.”
He set a target of $26 per share, which exceeds the current consensus of $22.43.
“We initiate coverage of North American Palladium with an Outperform rating given the company’s positive financial outlook, demonstrated capital returns through regular and special dividends, and unique exposure to palladium,” he said.