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North American Palladium Ltd. Message Board

  • reichardschwartz reichardschwartz Aug 13, 2012 2:56 AM Flag

    The Most Recent Debt Issuance And Expectated ROE

    The holder of the debt converts whenever the holder wants. (Does the Syndicate hold the debt or do the members of the syndicate hold the debt?) But until rates and institutional risk appetite increases, the holder will keep the 6.5% on the CA$45mil. The more important number is the 6.5%, because the 6.5% is now added to the cost per ounce of production.

    In the deal, NAP got ~CA$43million for a present value (if realized) of 14.8million shares. So the Company is borrowing 43million dollars for 14.8 million shares, or the effect of 6.5% of CA$43mil on gross revs.


    The Company has added 14.8 million shares to the mix of warrants and options and shares outstanding, thereby reducing the portion of real earnings allocated to each share.

    If I am a shareholder, my portion of earnings, which I expect to receive in the form of retained earnings to be used in Company investment, has been diminished by 8.5% for the price of CA$43million, or ~16% of the 10Aug2012 closing mkt price. So, what will the company receive on the EQUITY OF THE RETAINED EARNINGS brought about by what the company buys with 43 million dollars? And of that equity, what percentage is devoted to the 43million at present value? Is that equity going to grow more than 6.5% each year; if so, how much more?

    See, the 43 million will have enabled the equity to manifest. At least, that's what mngmt tells us.

    The shareholder gets paid based on the return on the equity.

    For the sake of argument, let's assume that a shareholder is given 43 million Canadian dollars to invest in something. The lender says, "I get 6.5% each year for five years. And $43mil is all you get because I'm not lending you any more money. I don't care if you pay me back tomorrow!" Is the shareholder able to buy something THIS YEAR that will afford him, without touching the 43 million dollars ever again, a continuous flow of cash of a particular amount which will enable him to buy something later?

    Are you going to be able to buy something with the cash that this 43 million buys you that would beat something else that you could buy with the cash that this 43 million buys you? And is what you're going to buy worth giving 8 1/2% of your share of the TOTAL of what you can buy to a lender who is charging you 6.5% of one QUARTER of what it costs to build the machine that enables you to buy that which the lender wants an 8.5% share of?


    The CA$2.90 per share means little. Ideally NAP will have paid back the 43 million before 2017 with a return on retained earnings. If so, the lenders won't sell the shares. They might convert them but they won't sell them. They'll keep their share of the profits, thereby reducing your share.

    My bet is that the lenders believe that NAP has the ability to repay the loan with the sale of LDI alone. The debentures are convertible because the lenders believe the Pd story and the monopoly type roll which NAP plays in the Pd market. If LDI expansion does NOT take place, then the deficit that everybody is forecasting is no longer a forecast. Stillwater is going dry. Russia doesn't have it or can't get it, and South Africa is Africa. NAP will produce what it has, and then money will flood into the company... and then LDI EXPANSION WILL TAKE PLACE.

    Don't get me wrong, I don't know what I expect NAP to earn over the coming years. Building that expectation is difficult given no earnings and no ROE history. That's why I want the price to go down. The decision becomes easier. I become a buyer of the mine rather than of the management. I seek to be a buyer of the management AND the mine.

    f '(Industrial Capacity Utilization in the US) is concave up.

    If we truly are in the fourth year of an extended bull market, AND interest rates rise--thereby washing bond buyers into stocks-- then we're not even close to the highs of the industrial stock indexes or the industrial metals.

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    • If the strikes and violence spread to the platinum Rustenburg mining complex that produces FORTY percent of the world's platinum, platinum and palladium have to surge and along with it SWC and PAL; one would think being in safe, secure North America.

      Right now, there are huge union militia's forming of upward 5,000 per and elite police units being sent in are not expected to be able to deal with such a heavy force. There are mounting calls for the army to be deployed in force. Tuesday should be very interesting.

    • You're right. I don't know what we're going to do.

      I'd like to see an Obama/Ryan ticket.

      One thought, however, about the surplus. I would think more likely 2015, not 2014. I was thinking MAYBE other countries' demand for UST's increases and thereby bond prices stay high. Fed sells out and passes profits to Congress.

      I sure do like Ryan's plan. Look up an interview with Ryan by Charlie Rose at CharlieRose.com.

      Nice comments, man.

    • whether paper or electronic, the effect of 'printing' is the same.

      Dilution of spending power.

      But I agree , in this age of digital money, gold should stand tall.

      Maybe even taller if the effort to print is less and it results in a greater degree of printing.

      Also a larger Nanny State pretty much ensures a larger need to print now than at any time in history as incentive gets destroyed and reliance on the state for handouts becomes a lifestyle.

      Nanny state ====>Big inflation.

    • Hmmm, How does 'Congress' have a surplus if rates rise?

      Keep in mind if rates rise, the economy will have to absorb the additional costs and tax revenues will fall.

      Debt service costs for any new debt will also increase.

      How the heck do you get a balanced budget?

      As to wealth redistribution by the govt as it sees fit, I have zero confidence that that would help matters...
      more likely, it would hurt.

      One thing should be clear to most by now is this idea that govt should always get involved and try to fix things by altering how the pie is shared....it does more harm than good as it destroys incentive for people to go out and participate and make a contribution.

    • ... comparison to what it now "conjurs" up on computers with FEDNET, etc. It would not surprise me that with all their new electronic initiatives, like electronic cards REQUIRED for Social Security payments, etc. that paper money will cease to exist sooner rather than later.

      However metals, like gold, have always held value even when outlawed by the Franklin Roosevelt, the communists, etc.
      Good money always chases bad money out. A recent example: Zimbabwe where small American coins are EAGERLY SOUGHT AND FOUGHT AFTER TODAY!

    • US trade def shrinks with EU. USD and Euro reach parity. Interest rates rise. Fed sells bonds that its been buying and reduces balance sheet. Money from Fed Treasury sales goes to Congress. Congress has a surplus in 2014.

      Somewhere in the mix Obama is elected. Redistributes the wealth. Expands middle class. Indusrial demand picks up thereby validating the bull market that US markets will have been in for six, seven or so years by then.

    • Interesting line of reasoning...

      I would add that by borrowing these funds PAL is able to move forward it's timing of monetizing its wealth in the ground.

      And if this allows for quicker generation of a larger profit than would have occurred othwerwise, it will allow the company to spend more on exploration at LDI a lot sooner.

      Clearly, PAL is capital constrained just like a lot of other jrs in the PM space but unlike so many others, there is light at the end of the tunnel for PAL.

      The ramping up of profitability appears pretty certain now and that's only using conservative Pd price estimates.

      Thing is, there's a real chance here that we'll see more profitability based on both lower costs and higher levels of production---- possibly reinforced by much higher prices for Pd in the next couple of years.

      what would that do to ROE?

      • 1 Reply to winsabokk
      • I don't know what "that" would do to ROE. We'll see what management does over the years. That's the bet an investor is taking with this company.

        Stock price is NOT always indicative of poor management, especially when you're talking junior miners.

        Assuming I believe in the Pd story, specifically the Ontario palladium story, all I have to go on as a shareholder or a potential investor is the history of present management's work.

        One thing I like to see management produce is a clear and CONSISTENT target. Then I like to see management proclaim and accomplish goals that enable the Company to reach or come closer to the target year over year. For the past few years, since 2009 at least, Biggar and NAP have been targeting one thing: "to become a low cost, mid-tier precious metals producer." A red flag would rise if, in January CapEX was $135million with a plan to borrow 100million in order to produce 250k oz of Pd, and they borrowed the 100mil but changed the CapEx to 75mill so that they could have more cash to buy a power plant WITHOUT achieving the 250k oz production capabiliy, only to reduce the target to what the 75mil capex enabled them to produce because the Company got drunk and spent all their money; i.e.: the excess of equity that they borrowed was gone, too.). Moving the target doesn't offend the crowd if the crowd is drunk, too, as long as the bullseye is painted around the arrow. Personally, I want the archer that I've got my money on to hit the bullseye that he agreed to hit when the games began.

        The equity that NAP had procured with the debentures is not %100 dilutive. The Company could have issued equity in the form of a stock split. That would have been horrible considering anticipated earnings with the present number of outstanding shares are ALREADY in the negatives.

        So, here is my attempt to answer your question, "What would that do to ROE?" repeated three times. If the equity issued via the convertible debentures enables NAP to reach its mid-tier miner status, AND the Pd price stays at $X/oz or more of PRESENT VALUE over the years, you will have made money as a shareholder... as long as management profitably utilizes the retained earnings brought about by LDI expansion gains. No ROE history exists, so the PAL play is a bet on the price of Pd and that management will use the cash procured from increased production at lower costs in a profitable way over the years. Your bet on management's ability to increase shareholder value is a bet that management has made the right decision with this year's equity placements.

        Someone lent NAP money. You own a share of that money. You also own a share of THE MONEY THAT IS MADE from what the borrowed money buys.


        Hope that helps... at least to clarify my understanding. If you believe in the Company, buy it. If the price decreases, buy more. Action junkies lose money in the end.

    • There are so many inaccuracies and misconceptions in your post that is is arduous to address them all.

      <<AND interest rates rise--thereby washing bond buyers into stocks->>

      Low interest rates have driven people into (divvy) stocks to get some real return. If interest rates rise, those needing income will shift from ever riskier stock to bonds.

      Over analysis of the $43 M offering. Forget ROE etc. In four words - they needed the money. Same to be said of teh $35M flow through. Without those two take a close look at what the balance sheet would look like.

      • 1 Reply to bellbell63
      • Bell, I think you got this flipped around. You posted: "If interest rates rise, those needing income will shift from ever riskier stock to bonds." If interest rates rise the OPPOSITE will occur, investors will lose money in bonds and pull out and into stocks, commodities, etc.

        Right now, there is a HUGE BOND BUBBLE, with TRILLIONS of dollars in nominally low and in some cases negative nominal interest rates (Senior French and Swiss bionds)where in effect the investor is paying the bond holder to hold theie money. And I am not even considering covering the loss of purchasing power to bond holders.

        The financial media has picked up on this and there is growing concern if interest rates spike, investors, particularly individuals who do not understand that you can lose your principal money even in "safe, secure Federal securities:, becauase as rates rise what investors are willing to pay for them will decrease.

        Right now the Feds have manipulated the markets so that they are able to finance ever increasing deficits and float more and more issues without really paying a lot in interest. This has been a remarkable feat but there are doubts how long they can keep this ponzi scheme going because it requires ever more conjuring up of "money" at a faster and faster rate. If they were not the Feds the game would have been over long ago ala Enron, Madoff, etc.

 
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