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High debt threatens this junior miner

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Every Monday we feature “A Stock to Sell” as our daily post. With every stock or investment we recommend as a sell, we give you a full explanation of why we advise against investing in it at this time.

North American Palladium (symbol PDL on Toronto; owns the Lac des Iles palladium mine near Thunder Bay. It also owns the Vezza gold project in Quebec’s Abitibi region.

Palladium is mainly used in catalytic converters for automobiles, as well as in jewellery.

In 2014, the company’s revenue rose 43.7%, to $220.1 million from $153.2 million in 2013. The increase came from higher palladium production and sales, higher palladium prices and more favourable exchange rates. Cash flow per share jumped to $0.12 from $0.04.

Lac des Iles is forecast to produce 185,000 to 205,000 ounces of palladium in 2015, up from 174,194 ounces in 2014.

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Mining stocks: Low-priced share issue would dilute investors’ holdings

Palladium prices should rise as the global economic recovery continues to increase vehicle sales. Production of the metal could also slow in South Africa, which has seen a wave of miners’ strikes in recent years, and sanctions-hit Russia.

The Lac des Iles mine’s reserves will keep it going until just 2019 at the latest. That means the company will have to undertake a major expansion to keep the mine viable.

However, North American Palladium’s long-term debt of $218.8 million is a very high 2.3 times its $94.0-million market cap. That means it will likely have to issue shares at today’s low price to expand Lac des Iles. That will dilute its current investors’ holdings.

TSI Network recommendation: sell.


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