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Edited Transcript of PDL.TO earnings conference call or presentation 3-May-19 12:00pm GMT

Q1 2019 North American Palladium Ltd Earnings Call

TORONTO May 11, 2019 (Thomson StreetEvents) -- Edited Transcript of North American Palladium Ltd earnings conference call or presentation Friday, May 3, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David C. Peck

North American Palladium Ltd. - VP of Exploration

* Erin Satterthwaite

North American Palladium Ltd. - VP of Corporate Affairs and Communications

* James E. Gallagher

North American Palladium Ltd. - President & CEO

* Timothy J. Hill

North American Palladium Ltd. - VP of Finance & CFO

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Conference Call Participants

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* Daniel McConvey

Rossport Investments LLC - Founder & Portfolio Manager

* David Stewart

GMP Securities L.P., Research Division - Research Analyst

* Derek Macpherson

Red Cloud Klondike Strike Inc., Research Division - VP of Mining Analysis

* Michael Parkin

National Bank Financial, Inc., Research Division - Mining Analyst

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Presentation

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Operator [1]

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Thank you for standing by. This is the conference operator. Welcome to the North American Palladium First Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Erin Satterthwaite, Vice President, Corporate Affairs and Communications for North American Palladium. Please go ahead, Erin.

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Erin Satterthwaite, North American Palladium Ltd. - VP of Corporate Affairs and Communications [2]

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Thank you, Arielle. Good morning, everyone. Thank you for joining today's webcast as we discuss our first quarter financial and operational results. With us today is Jim Gallagher, President and CEO; Tim Hill, Chief Financial Officer; and David Peck, Vice President, Exploration. Following today's presentation, as Arielle mentioned, the lines are going to be opened for Q&A. And today's webcast and presentation will be made available later this afternoon at our website, nap.com.

Please note that this conference call may include forward-looking information, which is based on a number of assumptions and actual results that could differ materially. All mining involves a number of inherent risks, and as a result, we invite you to read and understand the disclaimer. Please also be advised that all dollar amounts shown are in Canadian dollars unless otherwise noted.

And with that, I'm going to hand the presentation over to Jim Gallagher, President and CEO. Jim?

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James E. Gallagher, North American Palladium Ltd. - President & CEO [3]

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Thanks, Erin, and thanks, everyone, for being on the call today. We have had an exceptional quarter, and we're very pleased to be able to talk about this today.

The Lac des Iles site continues to lead in safety. And as you can see from the slide, we have had another lost time injury-free quarter, and our total reportable injury frequency is down to 1.5, which is well below the Ontario mining average. Production was good in the quarter. The underground mine produced over 6,700 tonnes per day at a cost of $38 a tonne hoisted to surface. Payable production was almost 53,000 ounces, and ounces sold, thanks to some inventory, was just over 57,000 ounces. Today, we'll also talk about the underground mining expansion. It's currently on track, and we're pleased with the progress.

Mill recovery for the quarter was 82.4%, slightly above our expectations. Mill throughput for the quarter, however, was below expectation, and I will discuss this in upcoming slides. Despite that, North American Palladium had yet another very good financial quarter. Revenue hit an all-time high for the company at just over $128 million. Net income was $39.5 million. Cash flow from operations was $74 million, and free cash flow was almost $47 million.

This quarter, we are quite pleased with the fact that our debt has been reduced to 0. Based on the strong balance sheet, strong free cash flows and positive outlook, the Board has made the decision to increase the dividend from $0.03 per quarter to $0.10. And finally, Dave Peck, our Vice President of Exploration, will speak today about our very promising developments on the exploration front.

But let's quickly take a look at the mine expansion. As most of you are aware, we are now in the process of taking the underground mine from the current rate of just over 6,700 tonnes a day up to 12,000 tonnes a day by 2021. 2019 is very much a development year while maintaining production at just below last year's output.

2,130 meters of development were completed in Q1, 28% higher than in Q1 of 2018. This March, we ramped up to a total of 30.5 meters per day, a very significant development rate for any mine and 75% higher than the 2018 annual average. All together, we're now moving close to 8,600 tonnes a day of ore and waste underground, which is 23% higher than what we moved for last year.

The point I really want to get across is that the total scope of work being done in the mine is very, very significant. We have a number of projects underway on surface as well. We are just finishing construction on the new mine dry facility to house the increased workforce. We have been expanding our camp. We have over 600 rooms on site now. And we are in progress with major upgrades to our water treatment plant and underground ventilation system. All are in support of the mine expansion.

Underground production for the quarter was quite good. However, total payable palladium was down slightly from the same period in 2018. The underground mine produced at a rate of almost 6,800 tonnes per day in the quarter, although lower throughput from RGO and the previous completion of the Sheriff Pit contributed to both reduced tonnes milled and lower grades compared to Q1 last year. Part of this was per the plan as we are focused on the mine development project, and part of this was due to issues we experienced in the mill, which hurt our total ounces of payable palladium in the quarter.

Mill performance was disappointing this quarter. Despite the lower mill production, produced ounces year-to-date were actually close to budget. And with the continued underground ramp-up, 2019 guidance remains at 220,000 to 235,000 payable palladium ounces.

With excellent underground mine performance and available surface stockpiles, we have pushed the production bottleneck to the mill. And unfortunately, this quarter, the mill has pushed back. Average throughput for the quarter was just under 9,000 tonnes per day versus our expectation at close to 12,000 tonnes per day. During the quarter, we had 2 significant conveyor belt failures and major work on both the primary and secondary crushers, all of which kept the mill down for extended periods.

Another fundamental change which has been problematic is the significant increase in fines that are generated by the SLS mining method. Mines tend to be wet, they freeze, they come into the mill like chunks of concrete, and we've had plugging of shoots and excesses -- excessive amounts of spillage. To mitigate these issues, we're putting a renewed focus on mill performance and especially maintenance practices. These include making the necessary organizational changes and applying the same level of focus to the mill as we have to the mine over the last few years.

The fines issue is perhaps an opportunity that could lead to higher than 12,000 tonnes a day throughput if we can redirect the fines early in the process and bypass the secondary crusher and SAG mill. This would require some redesign of the front end of the mill, which we have just begun evaluating with the aid of some external consultants.

These sorts of challenges are not untypical in mining and generally lead to disappointing results. However, our operation is proving to be very flexible and resilient. And in fact, we have had one of our best financial quarters in the company's history.

I'll ask Tim to walk us through those numbers.

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Timothy J. Hill, North American Palladium Ltd. - VP of Finance & CFO [4]

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Thanks, Jim. Good morning, everyone. One of our priorities as a management team has been to strengthen the company's balance sheet. Over the past year, the company has reduced its net debt by $100 million. Debt eliminated includes the term loan held by Brookfield Capital Partners and cash borrowing on the company's revolving credit facility. As mentioned last quarter, the company entered into a new revolving credit facility with the Bank of Montréal and BNP Paribas. The value of the revolver was USD 125 million, which amortizes by $4.75 million each quarter over its 5-year term.

At quarter end, the company had $136 million available on its credit facility and 25 -- sorry, $29 million in cash. $24 million of available credit on the revolver was utilized as financial assurance in the form of letters of credit for closure and reclamation liabilities for the Lac des Iles mine. Today, NAP's balance sheet shows some healthy ratios.

The company generated significant revenue last quarter. As a matter of fact, $128 million in revenue generated in Q1 was the company's highest quarterly revenue ever. The primary reason for this was the recently experienced highs in the palladium price, which averaged more than USD 1,400 per ounce of palladium during the quarter. Taking advantage of these palladium prices, the company drew down its concentrate inventory during the quarter to maximize sales. The net result was solid cash flows from operations of more than $75 million and free cash flow of around $47 million.

The company's underground cost per tonne mined continues to be one of the industry's lowest at $38 per tonne. Although production cost per tonne milled look like they jumped significantly this quarter, this is a result of the production issues in the mill and not with spending. In fact, total site costs in the first quarter were below budget by more than $1 million.

As mentioned last quarter, all-in sustaining cost per ounce produced in 2019 is expected to increase to an average of approximately USD 800 per ounce of payable palladium produced as a result of the increased spending in capital investment and underground operating development costs. The year-over-year increase of $210 per ounce shown on the slide resulted from increased sustaining capital costs associated with the underground development project, site expansion costs and TMF construction costs. It's important to note that due to the change in the type of TMF construction this year, the majority of TMF construction costs remain classified as sustaining capital in 2019, whereas the majority of these costs were classified as project capital in 2018.

Also contributing to the increased all-in sustaining costs were increased production and royalty cost combined with lower byproduct revenue and less palladium ounces produced in the quarter. The weaker Canadian dollar was also a factor in the calculation. Although the all-in sustaining cost for Q1 2019 are higher than that guided for the year, these costs are in line with the budget, and the company is confident that it will meet its guidance.

The company posted strong financial results again this quarter, setting things up for another record year. Adjusted EBITDA increased to more than $61 million in Q1 2019, and net income increased to $29.5 million. Capital investments in the underground mine expansion, the TMF, mobile equipment and infrastructure are in line with the annual plan and will provide the foundation necessary for the 12,000 tonne per day underground mine. The company also -- has also significantly increased investment in exploration as part of its comprehensive approach to expand its existing reserves.

During the quarter, the company incurred $4.5 million of eligible exploration expenditures towards the $10 million flow-through share offering completed last December.

With more on exploration activities during the quarter, I'll now hand over the call to Dave. Dave?

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David C. Peck, North American Palladium Ltd. - VP of Exploration [5]

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Thanks, Tim. Exploration expenditures for the quarter were $6.6 million, including an approximately equal split between the Lac des Iles and Sunday Lake drill programs. Total of 20,659 meters were drilled in the quarter with approximately 4,500 meters of underground exploration drilling and 10,000 meters of surface exploration drilling at the mine and over 6,000 meters at Sunday Lake.

Comprehensive update on last year's Lac des Iles exploration results was provided in the news release in February. And on Monday this week, we provided a separate release announcing new drilling results from our Sunday Lake project. As previously mentioned, we are completing a new exploration drift in the LDI mine that will provide critical drill platforms for our numerous underground exploration targets.

I'm pleased to say that today we are in the strongest position we've been in for many years and probably in the history of the company to expand the palladium mineral resources at Lac des Iles and extend the life of the operation. With so many compelling targets to pursue, we were just -- we just received Board approval for a $5.7 million increase in our diamond drilling programs at the mine site, which will significantly accelerate our definition and exploration drilling efforts and should result in an additional 50 kilometers of diamond drilling this year.

This slide -- the next slide is a level plan map of the 1065 level in the underground mine. It shows the underground exploration targets that we plan to test this year, including the B zone or B series satellite body south of the SLS reserves, the Mystery zone to the east and the recently discovered C Zone in the west. And of course, the primary purpose of the exploration drift was to provide access to the large and compelling Camp Lake exploration target south of the Camp Lake fault.

Since the beginning of the year, we've actually identified additional targets in close proximity to the Offset Zone, and these will be discussed during our next exploration update on our Lac des Iles programs. The image also shows the plan design for the exploration drift, and that drift is expected to be finished this summer. We actually plan to start using the drift within the next few weeks before it's finished with our initial exploration of the large Camp Lake target being the primary purpose of this early start-up phase.

The next slide is an oblique sectional view of the underground exploration targets with a view to the northeast. This illustrates the consistent south plunge of the known satellite bodies, most of which occur within a few tens of meters from the SLS reserves and most of which extend for over a kilometer vertically. Best documented of these satellite bodies is the B2 Zone, which was put into production 2 years ago and remains open at depth. The other satellite bodies named B1 and B3, respectively, are also being explored this year, and we are currently modeling historical exploration and definition drilling and believe we have identified 2 other satellite bodies. That will be confirmed later this year using results from our underground drilling.

Turning to our surface exploration program at Lac des Iles. As we reported on earlier this year, there are numerous geophysical targets to test as part of what we expect to be the largest surface drilling program ever conducted on the eastern part of the property. Recent results announced last year and new geophysical interpretations from the first quarter of this year have provided the large number of drill targets and target areas that you can see on this plan view image of the east mine block target area. The obvious interest in accelerating exploration in this area is the potential to discover significant new near-surface palladium resources that augment underground production, displacing or replacing low-grade stockpile feed with higher-margin material. We expect to provide new drilling results from our surface program later this quarter.

Now I'll discuss our Sunday Lake program. As we announced on Monday, we continue to expand on and improve the outlook for the Sunday Lake PGM zone. This slide shows the model of conductivity based on a recent surface geophysical survey. The red colors are areas of enhanced conductivity that we believe are associated with areas of increased magmatic sulfide content as well as increased platinum-group metal and base metal grades. This model was proven out or borne out by the results of our Q1 2019 drill program, our second program at Sunday Lake.

In particular, hole SL-19-026, which was designed to test our so-called Big Red target shown on this slide and located in an area of no drilling in the far west part of the property, returned the thickest and best grade intersection ever reported on the property with over 40 meters of greater than 5 grams combined platinum, palladium and gold and over 0.5% copper. This intersection includes the subinterval of almost 16 meters that created over 9 grams per tonne of combined precious metals and a smaller subinterval of 8 meters creating 13 grams per tonne combined precious metals and over 1% copper.

We also reported results from hole 29, also shown on this image, a large step out to the south from the Big Red discovery hole. Results from that hole included a 32-meter interval of over 3 grams per tonne combined precious metals, including a 5-meter interval of over 5 grams per tonne PGMs and over 0.5% copper.

Last map will show our new target areas at Sunday Lake. Based on the new drilling results and our recent geophysical modeling efforts, we have identified a large number of targets that warrant drill testing in the next program. In just over a year, we significantly expanded the size of the Sunday Lake PGM zone, which now extends nearly across the entire floor of the intrusion, covering an area of over 1 square kilometer. The next phase of drilling will logically start to determine the lateral continuity of the higher-grade mineralization we've been intersecting while continuing to explore for even higher grade, more massive sulfide accumulation zones in or adjacent to the 3 main conductivity trends observed on this image.

I'll now turn the call back to Jim Gallagher for an update on our recent marketing efforts. Jim?

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James E. Gallagher, North American Palladium Ltd. - President & CEO [6]

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Thank you, Dave. I'd like to spend a moment or 2 reviewing our recent marketing efforts. Over the first quarter, management, specifically Tim and myself, have been extremely engaged with marketing activities in North America and Europe, and we have been interviewed by numerous media outlets. We have given multiple desk presentations and participated in road shows in Toronto, Montréal, New York and London. We've attended mining-related conferences including the PDAC, the BMO conference in Florida and the gold show in Zürich. In late March, we held an Investor Day for North American Palladium that was well attended, and that was followed by an analyst site tour. It was a very, very busy quarter.

The results of that, while our story resonates very well, what's changed probably from a year ago is that the palladium market is much better understood than it was previously, especially in Europe. And more than one analyst has called us a free cash flow machine. They get the story.

The key overhanging questions have been around the lack of liquidity or free float in our stock with a 92% shareholder and the question of what Brookfield is going to do. We believe both points were addressed at the beginning of April with the Brookfield secondary offering.

At the beginning of April, the company announced a bought deal with a consortium of Canadian banks. Brookfield sold 5.77 million shares at $13 a share. The consortium was led by BMO and RBC. This reduced Brookfield's ownership from 91% down to 81%, increasing market liquidity at a price that should allow good upside for those investors.

Brookfield was pleased with the transaction outcome as it helped increase our shareholder base and raised North American Palladium's profile with a broader global audience. Going forward, we will be putting a greater marketing focus on Europe. With the increased awareness and coverage of the company, Brookfield will be evaluating the potential to do a larger transaction sometime in the future. There is no specific time line or deadline for this.

The increased liquidity brings us closer to improved stability in our share price, which has seen some volatility of late. As you can see from the graph, for most of 2018, our share price and the price of palladium were very well-correlated and actually reasonably stable. All of that changed in early February of this year. There were a couple of triggers to that. Obviously, record palladium prices almost on a daily basis were a key driver.

We also got our very first analyst coverage in several years at that time with a target price of $23. And of course, in early February, we announced our 2018 year-end results, and they were quite positive. That started an upward trend, but from there, unfortunately, some momentum-driven computer trading and subsequent shorting took over, and we saw a very dramatic spike in our share price followed by a dramatic drop and further volatility.

Obviously, these external variables and the sudden drop in the palladium price drove some of this volatility, it is not the fundamentals of the company. Shortly thereafter, we had the secondary offering, which did pull the share price down.

The simple fact is that the fundamentals of the company are very strong and have not changed. The same is true of the palladium market. At current prices, we believe our stock is really quite a bargain, and it will re-rate higher in the future. This re-rating of our stock is supported by the limited analyst coverage that we have at this time. Following all of the marketing activity in the first quarter and the site visit, we are expecting additional analyst coverage in the near future.

As previously stated, we believe that the fundamentals of the palladium market are still very strong and have not changed. A lot of analysts and media coverage supports that thesis. However, recent volatility has had an impact and is shaking some people's confidence.

One of the key items I will address today rather than repeating many of the talking points that we have shared over past calls is the potential for substitution of platinum for palladium. There are several reasons why platinum is not likely to substitute palladium. Over the years, the design of catalytic converters has changed dramatically. They are an order of magnitude more efficient at removing noxious gases than they have been in the past. In this reengineering, palladium has become the predominant metal.

The key feature of palladium is that it performs better under high heat and to achieve the most efficient catalytic reaction, heat is critical. For that reason, modern catalytic converters are designed to be very close to the exhaust site, and the reality is that platinum does not perform as well under high heat loading. It tends to break down, clump up and erode over time. So palladium is a much better product for that application.

It would take a fundamental redesign of the system, moving the catalytic converter further back to allow platinum to be used. And with that lower heat, it would be less effective. Platinum is denser than palladium, requiring a greater weight to achieve the same surface coating inside a catalytic converter, thereby negating much of the potential cost benefit.

I think the other key factor to be aware of is that the platinum market is still smaller than the palladium market. Talking about a wholesale change from palladium to platinum -- to a smaller market in platinum does not make sense and is really not a solution.

At the end of the day, even at a $2,000 palladium price, we might be looking at a $200 increase in the price of a vehicle. That is not material to the auto companies relative to the significant cost and reputation impact of failing to meet emission standards. Recent headlines include a potential lawsuit for Ford for not meeting its emission standards and a 1 million vehicle recall by Fiat Chrysler in the United States because they aren't meeting their standards. Those are headlines and issues that auto companies do not want to deal with, so there is no -- virtually no desire to substitute at this point in time.

Finally, with the strong cash flow that the company is now generating, the Board has made the decision to increase the quarterly dividend from $0.03 to $0.10 per share. The increased dividend reflects strong confidence in the palladium market moving forward, our operational ability to deliver the production growth, our reserve growth long term and, most importantly, in our team's ability and commitment to deliver the business results. Thank you for listening today.

And we will now take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Mike Parkin of National Bank.

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Michael Parkin, National Bank Financial, Inc., Research Division - Mining Analyst [2]

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I just had a question with your tailings facility. We've noticed a number of other companies up in your neck of the woods having some issues with water accumulation in the tailings facility. Can you just comment on how your tailings facility is performing in the spring?

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James E. Gallagher, North American Palladium Ltd. - President & CEO [3]

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Thanks, Mike, for the question. So this spring is probably one of the first springs that we actually have not had a major issue with that. And I would attribute that to the fact that, over the last 2 years, we constructed and commissioned a new water retention pond so we rapidly drained our tailings dams into this water pond. It has very significant capacity and has helped resolve most of our issues. So at this point, we do not have a major issue.

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Operator [4]

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Our next question comes from [Lawrence Farrell], a private investor.

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Unidentified Participant, [5]

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I just wanted to know 2 things. Did management buy any shares in the secondary? And how much do they own of the float?

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James E. Gallagher, North American Palladium Ltd. - President & CEO [6]

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So no, management did not buy any in the secondary. Management owns very little of the float.

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Operator [7]

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Our next question comes from Derek Macpherson of Red Cloud Klondike Strike Inc.

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Derek Macpherson, Red Cloud Klondike Strike Inc., Research Division - VP of Mining Analysis [8]

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Congratulations on a good quarter. Just a couple of things. First, on the challenges on mill throughput, do you expect any of those issues, particularly the conveyor and -- the conveyors issues, to leak over into Q2? Or do you expect to get back up to 12,000 tonnes a day?

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James E. Gallagher, North American Palladium Ltd. - President & CEO [9]

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So some of the maintenance issues are ongoing. So getting our maintenance practices, our preventative maintenance up to the level that we would be satisfied is probably going to take a bit of time. But I think we're already seeing some improvement. I mean April started off still pretty rough. And no, it isn't all just conveyors, it's plugged shoots it's spillages, it's a number of things. Given that we're out of the freezing weather, some of those has started to correct themselves already. And obviously, our goal is to implement some changes so that when freeze up happens again in only a few more months now, that we don't have some of the same issues. So I can't say that we'll get to 12,000 tonnes a day in this quarter, but we're showing signs of improvement. And we've got a real focus on it at this point in time, Derek.

I think the other thing to remember is because we feed -- top the mill up with the low-grade stockpile on surface, it is only a sub-1 gram material that gets displaced when we have the mill issues. And with the outperformance of the underground mines, actually better than our internal plan and slightly better grades overall, the head grades have been better, so it really has an impact to this as it might otherwise do.

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Derek Macpherson, Red Cloud Klondike Strike Inc., Research Division - VP of Mining Analysis [10]

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Okay. And I have a second question with respect to the palladium price. Obviously, you guys, you see the price well above sort of what the average spot price was. Is that just good timing? Or is that encompassing a provisional pricing adjustment?

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Timothy J. Hill, North American Palladium Ltd. - VP of Finance & CFO [11]

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Derek, it's Tim Hill here. We have a -- our smelter contract contains a quotational period whereby the final pricing of our product for platinum and palladium is 3 months after delivery. So the accounts receivable at year-end were repriced as we settled those prices in January, February and March, increasing our revenue, if that makes sense to you.

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James E. Gallagher, North American Palladium Ltd. - President & CEO [12]

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Plus the inventory adjustment.

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Derek Macpherson, Red Cloud Klondike Strike Inc., Research Division - VP of Mining Analysis [13]

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Okay. Yes, that makes sense. You -- basically, the pricing adjustment has helped boost the revenue in Q1. I guess platinum -- palladium sold in Q4, that adjustment has benefited Q1 revenue.

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Timothy J. Hill, North American Palladium Ltd. - VP of Finance & CFO [14]

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That's correct. The palladium sold in Q4 is repriced in Q1, and that's added to the revenue.

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Operator [15]

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Our next question comes from Daniel McConvey of Rossport Investments.

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Daniel McConvey, Rossport Investments LLC - Founder & Portfolio Manager [16]

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Congratulations on some nice free cash flow. Two questions, one just on the mill. You mentioned organizational changes in your remarks. What organizational changes are taking place? And kind of what things are going on in the mill that you're doing? You mentioned the conveyors broke, et cetera. I guess you're fixing those crushers, fixing the conveyors and...

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James E. Gallagher, North American Palladium Ltd. - President & CEO [17]

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Yes. So I mean, those things have obviously been repaired. But it highlighted, I think, a lack of good maintenance practices, so we've made some changes. We've actually said goodbye to 1 maintenance individual. We have put 2 maintenance general foremen full time in the mill rather than split focus. So we have 24/7 coverage from maintenance general foremen at the mill.

We have a couple of consultants in looking at some of our issues with the fines and how to accommodate that. There's some short term -- I mean there's some short-term issues, I think, we can clarify with the shoots and the shoot designs. Some of them have been modified over time and probably have helped to lead to some of these issues. So it's just a high level of focus and a concentration of maintenance people at the mill right now. That's probably the biggest part of the organizational changes.

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Daniel McConvey, Rossport Investments LLC - Founder & Portfolio Manager [18]

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Okay. Second question, with all that's happening with the auto industry right now, and it seems like every car company has been hit with something, Ford was the latest, are you getting any more calls from the auto industry players just in terms of interest in your ability to grow production, to increase your reserves, et cetera, to give them comfort that they have a good place in North American Palladium in terms of securing the metal going forward? Have you -- any more so than normal?

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James E. Gallagher, North American Palladium Ltd. - President & CEO [19]

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It's a great question, and I'm surprised that the answer is no because it would almost seem logical that the auto companies -- and as you know, from our flow sheets, we sell the concentrate and we're very far disconnected from the end product that the auto companies need. But nevertheless, I would also have expected that we might have taken some more incoming calls about trying to lock down future production, et cetera, and some research. Of course, we do -- we talk to people like Johnson Matthey who wanted to talk to us because they keep a focus on long-term palladium supply and try to understand that market. So we do, do that on a quarterly basis. And of course, they are a big manufacturer of catalytic converters. But not directly from the auto companies at all. In the last several months, we've not taken any incoming calls.

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Operator [20]

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Our next question comes from David Stewart of GMP Securities.

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David Stewart, GMP Securities L.P., Research Division - Research Analyst [21]

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Congrats on the dividend increase and the free cash flow. Just wondering, since the increasing contribution from the Roby zone is critical to the underground ramp-up to 12,000 tonnes, was wondering if you could provide a breakdown of tonnes and grade for both the Offset and the Roby zones.

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James E. Gallagher, North American Palladium Ltd. - President & CEO [22]

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Not at this point in time, Dave. We can probably circle back afterwards and give you that split if you want.

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David Stewart, GMP Securities L.P., Research Division - Research Analyst [23]

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Okay. Great. And then for the increased proportion of fines from underground, do you think you can actually turn that into an advantage and increase throughput given that you can bypass crushing and grinding with fines?

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James E. Gallagher, North American Palladium Ltd. - President & CEO [24]

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Well -- so that's a bit of the challenge, of course, that I've thrown back at the team, and we're going to bring in an engineering team. Number one, just to -- the reality is this mill when it was designed was for our big, coarse open-pit muck. And it ran historically at even higher throughputs than the 12,000 that we're targeting back in those days at a much lower recovery. So this fines issue is certainly a challenge for us. It's quite a dramatic change. I was up on site less than a month ago, and I'd say the trucks being dumped from underground, which is now obviously the majority of the material feed into the mill, was probably -- and this is a nonengineering number but probably 80% fines with chunks in it. So it is quite a dramatic change. And the whole front end of the mill, of course, is crushing and grinding, and we have a significant portion that's already ground.

So we're going to start with an analysis of exactly what that feed is. Rather than Jim just guessing at 80%, we'll get some engineering numbers on that, do some sieve analysis, some particle size analysis and at a minimum, just improve the front end of that mill with the conveyors and the shoots. But obviously, the grinding circuit is part of our -- what bottlenecks the mill. Something has to bottleneck a mill and be the limiting factor. And if we can find a way to divert that, take advantage of the fines, then there is potential upside there. So that's a longer-term project. Obviously, we're focused on just getting back to the nominal 12,000 tonnes a day. But there's -- I do see upside there, and that's the mandate we are giving to the team on site and with the consultants.

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David Stewart, GMP Securities L.P., Research Division - Research Analyst [25]

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Okay. Great. And so you said it's -- I mean nonengineering number, but 80% fines with chunks. Is that then also the reason that underground production exceeded plan? Because if it's fines in a truck, you can fill it more tonnes, an underground truck, than you can if it's a lot of chunky rocks, right?

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James E. Gallagher, North American Palladium Ltd. - President & CEO [26]

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Yes. So if we do come up with the split on SLS versus the upper mine, I think you'll find that -- so the simple answer, yes, truck loading factors are better when you have lots of fines. So you're absolutely correct there. But I think it's really attributed to the number of opportunities that we -- the team has opened up, including in the Roby zone. So we've had a healthy production in the upper part of the mine, not just the SLS. So I think it's -- from the total number of areas we have to mine, including a couple that were not even in our original budget that the team is taking advantage of, so I think it's the overall flexibility that comes with the significant number of draw points we have to pull with -- pull from.

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Operator [27]

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Our next question comes from [David Wasik] of JD Investments.

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Unidentified Analyst, [28]

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Congratulations and thank you on a job well done to you and your team. I understand there's a marketing push to get some exposure to North American Palladium, which is great to hear. Can we anticipate seeing a move from over-the-counter trading to -- in the U.S. to the New York Stock Exchange?

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James E. Gallagher, North American Palladium Ltd. - President & CEO [29]

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So not immediately, although the potential to list other than Toronto certainly has been discussed. And of course, when we were over in Europe, there was pressure to why don't we list in London. So we have not taken a decision in either direction at this point, but it's something we have discussed. But it's not high on the list, to be honest, at this point in time.

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Operator [30]

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This concludes both the question-and-answer session and today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.