RCKS Talk

29-Mar-2019

North American Palladium Ltd

Site Visit: Q1 FCF May Warrant Dividend Increase

Impact: Positive

Based on the recent analyst day and site visit, along with QTD palladium price, we believe North American Palladium is poised to generate significant FCF in Q1 which may justify a quarterly dividend increase. Additionally, we believe the company is carrying strong financial and operational momentum into Q2/19. We continue to believe that North American Palladium’s improved operations and deliverable expansion plans have it poised for a share price re-rating. In addition, its leverage to a strong palladium market provides additional torque.

Highlights:

  • Evidence points to the potential for a dividend increase. We highlighted in our initiation report, that the company should have the capacity to increase the dividend. In our view, the key factors for an increase are: 1) solid operations, 2) strong Palladium price and 3) on-time, on budget delivery of the underground expansion. Our site visit suggests 1 and 3 are on-track. As well, with the palladium price averaging US$1,399/oz in Q1, we expect C$34M in FCF, which should allow the company to repay its debt and return more capital to shareholders.
  • Site visit suggests there may be upside to our estimates. The potential exists for lower operating costs, improved recoveries and exploration success. We believe exploration could have the largest near-term impact as multiple new underground targets (Figure 2) and surface targets (Figure 3) have the potential to drive production beyond our estimates by replacing the lower grade stockpile as mill feed.
  • Not the North American Palladium you remember. Our second site visit reinforces our view that under Brookfield’s stewardship, North American Palladium’s team has significantly improved operations and we believe the company is poised to execute operationally going forward. As well, we continue to be impressed by the company’s exceptional employee engagement at all levels.
 
Valuation:
Re-rating coming, dividend increase would accelerate it. Using US$1,300/ oz Pd, our fair value of C$23.50 is based on 6.0x our one-year forward, NTM EBITDA estimate of C$224M (unchanged). We believe the company’s ability to deliver FCF should materially re-rate the stock. Additionally, a further return of capital to shareholders would be a significant catalyst. Upcoming catalysts include: 1) Q1 operating and financial results (Q1 2019) and 2) Exploration updates (ongoing).

 

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