North American Palladium Ltd.
TSX : PDL
AMEX : PAL

North American Palladium Ltd.

March 02, 2006 21:07 ET

North American Palladium Ltd. Announces Fourth Quarter and Year End 2005 Financial Results

TORONTO, ONTARIO--(CCNMatthews - March 2, 2006) - North American Palladium Ltd. (TSX:PDL)(AMEX:PAL) -



Overview
--------

- Realized a net loss for the year ended December 31, 2005 of
$53.6 million or $1.03 per share on revenues of $92.6 million compared
to net loss of $92.1 million (after a non-cash write-down of
$108 million) or $1.79 per share on revenues of $185.2 million for the
year ended December 31, 2004.
- The 2005 year end net loss is primarily due to: the depressed spot
palladium price, as the Company no longer had the benefit of
recognizing palladium production at US$325 per ounce under the
previously held Palladium Sales Contract; a decline in head grade
which resulted in lower metal production and recoveries; increased
waste to ore strip ratio; increased operating costs including diesel
fuel and power costs; a strengthening Canadian dollar, and operational
difficulties at Lac des Iles during the fourth quarter.
- 2005 cash cost per ounce of palladium produced (net of by-product
credits) increased to US$359 from US$159 in 2004.
- During the fourth quarter, the palladium price began to rise from its
average of US$189 during the first nine months of 2005 to an average
of US$239 during the last three months.
- Updated resource estimate on Offset High Grade Zone at Lac des Iles
increases 150% to 2,455,000 ounces of palladium.


Results of Operations

The Company realized a net loss for the year ended December 31, 2005 of $53,611,000 or $1.03 per share on revenues of $92,606,000 compared to a net loss of $92,110,000 or $1.79 per share on revenues of $185,204,000 for the corresponding period a year earlier. The net loss in 2004 was attributable to the non-cash charge $108,000,000 as the Company performed an impairment test, which resulted in a write down of the carrying value of mining interests.

In 2005, the Company's palladium production of 177,167 ounces was significantly lower than the 308,931 ounces of palladium produced in 2004. The production for 2005 was sold into the spot market and revenue did not benefit as it did in 2004 from the floor price of US$325 per ounce under its Palladium Sales Contract (except for 6,403 ounces that were delivered under the Palladium Sales Contract). For 2005, revenue from palladium sales was realized at an average of US$230 per ounce. In both 2005 and 2004, by-product metal pricing improved. For 2005 this offset some of the negative impact experienced from lower palladium spot prices, and the strengthening Canadian dollar.

The Company reported a net loss for the three months ended December 31, 2005 of $11,037,000 or $0.21 per share on revenues of $25,609,000 compared to a net loss of $107,663,000 or $2.09 per share on revenues of $35,182,000 for the three months ended December 31, 2004. The results for the fourth quarter of 2004 included the non-cash impairment charge described above.

Production costs for 2005, including overheads but excluding non-cash amortization, were $99,322,000 were comparable to $102,936,000 in the prior year, however, unit cash costs to produce palladium (production costs including overhead and smelter treatment, refining and freight costs), net of by-product metal revenues and royalties, increased to US$359 per ounce in 2005 compared to US$159 per ounce in 2004. The increase in unit cash costs was caused by a combination of lower ore grades and metal recoveries, which led to a 43% decrease in palladium production to 177,167 ounces in 2005 compared to 308,931 ounces in 2004, combined with a 31% decrease in revenue from by-product metals. In addition, throughout 2005 there was an increased waste to ore strip ratio of 3.14:1 compared to 2.68:1 in 2004 and continuing pressure on costs, particularly steel, tires, power, diesel fuel and ongoing mill repairs. In the fourth quarter, cash costs to produce palladium increased to US$565 per ounce compared to US$251 per ounce in the fourth quarter of 2004. The increase in unit costs in the current quarter was due to a decline in ore grade and tonnes milled as a result of equipment problems in the milling operations.

During the fourth quarter of 2005, the mill processed 1,100,540 tonnes of ore, or an average of 11,962 tonnes per day, with a palladium grade of 1.47 grams per tonne, producing 36,833 ounces of palladium at a recovery rate of 70.7%. This compares with the fourth quarter of 2004, when the mill processed 1,202,942 tonnes of ore, or 13,075 tonnes per day, with a palladium grade of 2.17 grams per tonne, producing 62,526 ounces of palladium at a recovery rate of 74.6%. Mill availability during the fourth quarter was affected by interruptions in the crushing cycle, which led to a decrease in mill throughput, availability and feed grade. As a result of having to utilize the reserve ore stockpile, frozen rock chunks became an issue causing many blocked chutes. The primary crusher was temporarily shut down at the beginning of the first quarter 2006, and has since been repaired and is operating at budget.

Non-cash amortization expense decreased to $18,340,000 in 2005 compared to $36,710,000 in 2004. The lower amortization amount is attributable to the decrease in the unit of production amortization rate due to an impairment charge on its mining interests at the end of 2004 that resulted in a non cash charge of $108,000,000.

With the increased activities on the Company's exploration projects, exploration expense was $7,927,000 in 2005 compared to $2,479,000 in the prior year. In 2005, the Company incurred interest expense on long-term debt of $2,509,000 compared to $1,756,000 in 2004. The increased interest expense in the current year reflects the increase in interest rates year-over-year.

Cash Flow and Financial Position

Cash used in operations (prior to changes in non-cash working capital) was $39,000,000 in 2005, compared to $52,059,000 in 2004. The $91,059,000 decrease in operating cash flow was attributable to the 43% reduction in palladium production, as well as the reduced palladium revenue as a result of not having the benefit of the floor price of US$325 under the Palladium Sales Contract and having to sell into the spot market (except for 6,403 ounces) with its depressed palladium prices evident for much of the year, combined with a 31% decrease in revenue from

by-product metals, and the further weakening in the US dollar. Changes in non-cash working capital provided $29,587,000 of cash in the current year as compared to $29,731,000 in 2004. Palladium awaiting settlement declined to 65,905 ounces at December 31, 2005 compared to 114,186 ounces at December 31, 2004. The reduction in the physical quantity of metal in the concentrate awaiting settlement combined with the lower palladium price and a weaker US dollar all used to value the concentrate awaiting settlement resulted in a 45% reduction in the value of concentrate awaiting settlement. After allowing for non-cash working capital changes, cash used by operations was $9,413,000 in 2005 compared to cash provided of $81,790,000 in 2004.

Investing activity required $35,400,000 of cash in 2005. Two major projects were undertaken during the year, the upgrade of the tailings management facility at $5,800,000 and the ongoing underground mine development, which required $23,900,000, excluding $6,500,000 of mining equipment purchased under capital leases. This compares with $26,464,000 of net investing activities in 2004.

The Company's debt position was reduced to $46,272,000 at December 31, 2005 compared to $50,171,000 at December 31, 2004 and the year-end cash and cash equivalents balance reduced to $15,031,000 compared to $65,755,000 for the prior year.

The Company will require additional funding in 2006 to meet its ongoing obligations. Management has been successful in the past in securing financing in the capital markets and has no reason to believe it will be unable to continue to do so in the near future.



Production Statistics
---------------------

-------------------------------------------------------------------------
Fourth Quarter Twelve Months
December 31 December 31
2005 2004 2005 2004
----------------------------------------------
Palladium (oz) 36,833 62,526 177,167 308,931
Payable Palladium (oz) 33,801 56,756 161,469 281,743
Platinum (oz) 3,761 5,474 18,833 25,128
Gold (oz) 2,915 4,930 14,308 25,679
Copper (lbs) 1,117,885 1,604,009 5,514,670 7,836,183
Nickel (lbs) 531,669 848,519 2,353,227 4,320,970
-------------------------------------------------------------------------
Ore Tonnes Milled 1,100,540 1,202,942 4,780,599 5,298,544
Ore Tonnes Mined 737,467 1,036,093 3,705,555 4,574,134
Waste Tonnes Mined 2,608,998 3,581,858 11,619,658 12,275,889
-------------------------------------------------------------------------
Waste to Ore Strip Ratio 3.54:1 3.46:1 3.14:1 2.68:1
-------------------------------------------------------------------------


Exploration Update

At Lac des Iles, drilling on the Offset High Grade Zone resource expansion project was completed in early December. A total of 18,230 metres in 15 holes were drilled on the faulted off extension of the Main High Grade Zone. The Offset High Grade Zone was first discovered in 2001 and was tested by 19 drill holes which outlined an inferred resource of 5.37 million tonnes grading 6.10 grams per tonne palladium, 0.34 grams per tonne platinum, 0.33 grams per tonne gold, 0.07% copper, and 0.12% nickel (see 2004 Annual Report).

The 2005 exploration program successfully extended the Offset High Grade Zone for over 600 metres along strike and 700 metres down dip. Assay results from this year's program included: 136.70 metres at 5.56 grams per tonne palladium, 0.37 grams per tonne platinum, 0.34 grams per tonne gold, 0.09% copper, and 0.12% nickel from hole 05-016, which is the strongest intercept drilled to date on either the High Grade or Offset High Grade Zone. These types of widths are significant because they may be amenable to future lower cost, large scale bulk mining techniques.



Below are the assay results from the final three holes drilled in this
program.


-------------------------------------------------------------------------
(metres) (grams per tonne) %
-------------------------------------------------------------------------
Palla- Plati-
Hole ID From To Interval dium num Gold Nickel Copper
-------------------------------------------------------------------------
05-002(i) 541.50 549.00 7.50 7.259 0.579 0.488 0.10 0.10
-------------------------------------------------------------------------
and 1316.95 1328.00 11.05 4.737 0.256 0.112 0.08 0.10
-------------------------------------------------------------------------
05-011 1238.60 1267.00 28.40 6.356 0.330 0.319 0.09 0.10
-------------------------------------------------------------------------
incl. 1256.00 1262.00 6.00 11.212 0.523 0.499 0.16 0.19
-------------------------------------------------------------------------
05-012(i) 531.00 543.50 12.50 7.110 0.555 0.544 0.10 0.10
-------------------------------------------------------------------------
and 1172.00 1176.00 4.00 2.995 0.329 0.238 0.07 0.09
-------------------------------------------------------------------------


In late 2005, the Company contracted Roscoe Postle Associates Inc. (RPA) to carry out an updated resource estimate and scoping study on the Offset High Grade Zone. A mineral resource estimate of 2,455,000 ounces of palladium has now been defined.

The Company also contracted RPA to prepare the updated reserve and resource estimate for the year ended 2005. The updated reserve and resource chart is attached to the end of this release.

Drill hole data were used to develop the resource model using Gemcom modeling software under the direction of Richard E. Routledge, M.Sc., P.Geol. of RPA, an "Independent Qualified Person", in conjunction with Bruce W. Mackie, M.Sc., P. Geol. Vice President of Exploration, NAP, the designated Qualified Person for the project.

Tonnages were calculated using a bulk density of 2.89. Grade blocks were modeled at 10 metre by 10 metre by 10 metre blocks with inverse distance squared (ID2) with variable percentage block inclusion to accurately represent model volumes. The preliminary resource calculated at an incremental cut-off grade of 3.2 grams per tonne palladium equivalent, and is summarized below:



Offset High Grade Zone Resource(i)
-------------------------------------------------------------------------
Category Tonnes Pd Pt Au Cu Ni Pd Pt
(1,000) (g/t) (g/t) (g/t) (%) (%) (000 oz) (000 oz)
-------------------------------------------------------------------------
Inferred
Mineral
Resources 14,590 5.24 0.36 0.35 0.10 0.12 2,455 170
-------------------------------------------------------------------------

(i) Mineral resources which are not mineral reserves do not have
demonstrated economic viability. The estimate of mineral resources
may be materially affected by environmental, permitting, legal,
title, taxation, marketing, or other relevant issues.


In October 2005, the Company announced that it had entered into a letter of intent to form a joint venture with Gold Fields Limited to further explore and develop a mining operation at the Arctic Platinum Project ("APP") located in Finland. The Company believes that the APP represents one of the world's best undeveloped platinum group metals opportunities. North American Palladium will have an option to earn approximately a 50% interest in APP and may acquire a 60% interest in certain circumstances. North American Palladium will be the operator of the joint venture.

The APP covers several advanced stage exploration properties, including the Konttijarvi and Ahmavaara Open Pit Projects, collectively known as the Suhanko Project, that were the subject of a Feasibility Study completed by Gold Fields in early 2005. The exploration target at Suhanko is for bulk tonnage, disseminated to locally semi massive base metals and platinum group elements occurring near the base of the Konttijarvi-Suhanko Intrusive. The APP also includes the nearby Narkaus (SK) and the Penikat (SJ) Projects both of which host significant platinum group and base metal mineralization.

For 2006, the Company plans to re-evaluate the Suhanko Project at a higher cutoff value than what was used in the Gold Fields Feasibility Study. While this would likely result in a smaller operation, it would also result in an increase in the grade being mined. Early in 2006, the Company also intends to begin drilling selected targets within the Narkaus and Penikat Projects as well as commence preliminary mineralogical and metallurgical test work. Drilling is expected to continue through the first half of 2006 after which mineral resources will be calculated to be incorporated into the larger APP scoping study currently scheduled to be completed early to mid 2007.

In January URSA Major Minerals Incorporated (TSXV:UMJ) announced the completion of a feasibility study for the Shakespeare nickel, copper, PGM project located 70 kilometres west of Sudbury, Ontario. The study was managed by Micon International Limited of Toronto who evaluated a base case of an open-pit mine and 4,500 tonnes per day on site concentrator (see URSA press release dated January 20th, 2006).

The project generated an after tax internal rate of return (IRR) of 14.5% (20.0% pre-tax IRR) on an initial total capital cost of $118,473,000. The feasibility study defined a diluted Probable Reserve of 11,266,000 tonnes grading 0.33% Ni, 0.35% Cu, 0.02% Co, 0.33 grams per tonne Pt, 0.37 grams per tonne Pd and 0.19 grams per tonne Au and was determined by applying an $11.75 per tonne NSR internal cut-off value which is the sum of the mill processing and G&A costs. The Shakespeare Project is proposed to be a 60% North American Palladium, 40% URSA Joint Venture.

URSA will proceed with permitting of the project and has engaged Golder Associates Limited to manage the permitting program. The Company is currently evaluating opportunities to reduce capital costs for the Shakespeare project including the use of equipment presently at NAP's Lac des Iles Mine.

On the Company's Shebandowan Joint Venture with INCO Limited, a short 4 hole (584 metre) diamond drill program was carried out around the historic "D Zone" located 1500 metres along strike on the past producing Shebandowan nickel and copper Mine. Results included: SP-05-005 2.50 metres of 1.63% Ni, 0.93% Cu, 0.044% Co, and 1.499 grams per tonne 2 PGM plus Au and 4.55m of 3.00% Ni, 0.90% Cu, 0.062% Co and 2.233 grams per tonne 2 PGM plus Au. Further drilling is planned in the first quarter of 2006.

Management's Outlook

While the latter half of 2005 and early 2006 were more challenging than originally anticipated, management is confident that the operational difficulties at Lac des Iles have since been fully resolved. The setbacks in the mill have been repaired and the team is eagerly anticipating the start up of the underground operations, which is set to commence late in the first quarter. Once the underground comes online fully, and palladium production returns to historical levels, the Company expects to be well positioned to benefit from the increasing palladium price.

The exploration projects that are currently underway hold promise for North American Palladium's future as a PGM and base metals producer. The APP joint venture with Gold Fields is progressing, as the exploration team prepares to commence drilling on these properties in order to delineate a 5 million ounce resource with grades greater than 3 grams per tonne. The decision on the Shakespeare joint venture with URSA is expected shortly as the project moves into its permitting stage, and the Company is pleased with the original feasibility results. The Offset High Grade Zone also holds significant potential for the Lac des Iles mine, as the size of the resource increases, enabling operations here to possibly extend past the current end of mine life date.

The palladium price is appreciating in-line with the rest of the metal markets, apparent by the fourth quarter's average price of US$239 in comparison to the US$189 average for the first nine months of 2005. As manufacturers begin to use palladium as a replacement for its sister metal platinum in catalytic converters, and environmental standards continue to tighten in combination with increasing global car production, palladium demand and price is expected to continue rising. Demand for palladium also saw an exponential increase in the jewellery industry, predominantly in China, where it is estimated that over 1.2 million ounces were used in pure palladium pieces in 2005. This further strengthens the belief that consumers are seeking alternative pure, white precious metal jewellery to white gold and high priced platinum that have dominated the market for years. The Royal Canadian Mint also launched its first palladium bullion coin near the end of 2005 and sold over 70,000 coins in its first 2 months on the market, signifying a new trend in investor demand for the physical metal.

Reconciliation Between Net Income in Accordance with Canadian GAAP and Adjusted Net Income

The adjusted net income reported in this release has not been calculated in accordance with Canadian GAAP, the accounting principles under which our consolidated financial statements are prepared, and there is no standard definition in such principles for such adjusted net income or loss. Accordingly, it is unlikely that comparisons can be made among different companies in terms of such adjusted results reported by them.

The following table provides reconciliation between our adjusted net income and net income (loss) as reported in accordance with Canadian GAAP for the years ended December 31, 2005 and December 31, 2004:



(in thousands except per share amounts)

Basic Net Income
Net Income Per Share
Year Ended Year Ended
December 31 December 31
2005 2004 2005 2004
-----------------------------------------
Canadian GAAP net income (loss)
as reported $(53,611) $(92,110) $ (1.03) $ (1.79)
Impairment charge net of tax - 103,376 - 2.01
Foreign exchange (gain) loss
net of tax (268) 340 (0.01) 0.01
Insurance recovery net of tax - (4,352) - (0.09)
-----------------------------------------
Adjusted net income $(53,879) $ 7,254 $ (1.04) $ 0.14
-------------------------------------------------------------------------

-------------------------------------------------------------------------


The Company will host its year-end conference call at 1 p.m. EST on Friday, March 3, 2006. The toll-free conference call dial-in number is 1-866-249-1964 and the local and overseas dial-in number is 416-644-3422. The conference call will be simultaneously web cast and archived at www.napalladium.com in the Investor Centre under Conference Calls. A replay of the conference call will be available until March 8, 2006; toll-free at 1-877-289-8525, locally and overseas at 416-640-1917, access code 21173882 followed by the number sign.

North American Palladium's Lac des Iles Mine is Canada's only primary producer of platinum group metals and is one of the largest open pit bulk mineable palladium reserves in the world. In addition to palladium, the Company earns substantial revenue from by-product nickel, platinum, gold and copper. Palladium use in the auto industry continues to be an important component in controlling exhaust emissions as mandated by more stringent hydrocarbon emissions standards for cars, particularly in the United States, Europe and Japan. Palladium is also used in the dental, electronics, jewellery and chemical sectors.

Forward-Looking Statements - Certain statements included in this news release are forward-looking statements which are made pursuant to the "safe harbor" provisions of the United States Private Securities Litigation Reform Act of 1995. They include estimates and statements that describe the Company's future plans, objectives and goals, including words to the effect that the Company or management expects a stated condition or result to occur. When used herein, words such as "estimate", "expect", "believe", "intend", "budget", "plan", "projection" and other similar expressions are intended to identify forward-looking statements. In particular statements relating to the impairment charge and the estimated future metal prices, cash flows, expenses, capital costs, ore production, mine life, financing, construction and commissioning are forward- looking statements. Such forward-looking statements involve inherent risks and uncertainties and are subject to factors, many of which are beyond our control, that may cause actual results or performance to differ materially from those currently anticipated in such statements. Important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements include among others metal price volatility, changes in the US/CDN dollar exchange rate, economic and political events affecting metal supply and demand, fluctuations in ore grade, ore tonnes milled, geological, technical, mining or processing problems, recoverability of metals, future profitability and production, availability of financing on acceptable terms and unexpected problems during the development, construction and start-up phases of the underground mine, and the salvage value of equipment. For a more comprehensive review of risk factors, please refer to the Company's most recent Annual Report under "Management's Discussion and Analysis of Financial Results" and Annual Information Form under "Risk Factors" on file with the U.S. Securities and Exchange Commission and Canada provincial securities regulatory authorities. The Company disclaims any obligation to update or revise any forward-looking statements whether as a result of new information, events or otherwise. Readers are cautioned not to put undue reliance on these forward-looking statements.



North American Palladium Ltd.
Consolidated Balance Sheets
(expressed in thousands of Canadian dollars)
(unaudited)

December 31
2005 2004
Assets
Current Assets
Cash and cash equivalents $ 15,031 $ 65,755
Concentrate awaiting settlement, net - Note 2 37,453 68,259
Inventories - Note 3 8,599 8,954
Crushed and broken ore stockpiles 7,267 9,256
Other assets 2,344 1,615
------------ ------------
70,694 153,839

Mining interests, net - Note 4 159,523 136,009
Mine restoration deposit 7,247 5,973
Crushed and broken ore stockpiles 239 1,379
Deferred financing costs 654 697
------------ ------------
$ 238,357 $ 297,897
------------ ------------
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable and accrued liabilities $ 16,392 $ 20,231
Taxes payable 386 521
Current portion of obligations under capital
leases - Note 5 2,323 1,481
Current portion of long-term debt - Note 6 6,664 6,815
Kaiser Francis credit facility - Note 7 13,407 -
------------ ------------
39,172 29,048

Mine restoration obligation 7,894 7,592
Obligations under capital leases - Note 5 6,218 3,182
Long-term debt - Note 6 17,660 24,851
Kaiser-Francis credit facility - Note 7 - 13,842
Future mining tax liability 202 1,549
------------ ------------
71,146 80,064
Shareholders' Equity
Capital stock - Note 8 325,592 322,904
Contributed surplus 874 573
Deficit (159,255) (105,644)
------------ ------------
Total shareholders' equity 167,211 217,833
------------ ------------
$ 238,357 $ 297,897
------------ ------------
Commitments - Notes 9



North American Palladium Ltd.
Consolidated Statements of Earnings (Loss) and Deficit
(expressed in thousands of Canadian dollars, except share and
per share amounts)
(unaudited)

Year ended December 31
2005 2004 2003
------------ ------------ ------------
Revenue from metal sales
- Note 10 $ 92,606 $ 185,204 $ 192,141
------------ ------------ ------------
Operating expenses
Production costs, excluding
amortization and asset
retirement costs 99,322 102,936 103,654
Smelter treatment, refining and
freight costs 15,777 23,602 19,048
Insurance recovery - (7,148) -
Amortization 18,340 36,710 28,590
Administrative 6,616 5,557 3,788
Exploration expense 7,927 2,479 1,942
Loss on disposal of capital
assets - 277 788
Asset retirement costs 476 905 921
Write-down of mining interests - 108,000 2,315
------------ ------------ ------------
Total operating expenses 148,458 273,318 161,046
------------ ------------ ------------

Income (loss) from mining
operations (55,852) (88,114) 31,095
------------ ------------ ------------
Other income (expenses)
Interest on long-term debt
- Notes 5,6 and 7 (2,509) (1,756) (3,158)
Write off of deferred financing
costs - (788) -
Foreign exchange gain (loss) 268 (340) 18,138
Interest income 1,641 494 474
Derivative income - 213 -
Interest expense (41) (29) (17)
------------ ------------ ------------
Total other income (expenses) (641) (2,206) 15,437
------------ ------------ ------------

Income (loss) before income taxes (56,493) (90,320) 46,532
Provision for income taxes
- Note 11 (2,882) 1,790 8,154
------------ ------------ ------------
Net income (loss) for the year (53,611) (92,110) 38,378

Deficit, beginning of year (105,644) (13,534) (51,912)
------------ ------------ ------------
Deficit, end of year $ (159,255) $ (105,644) $ (13,534)
------------ ------------ ------------

Net income (loss) per share
Basic $ (1.03) $ (1.79) $ 0.76
------------ ------------ ------------
Diluted $ (1.03) $ (1.79) $ 0.75
------------ ------------ ------------
Weighted average number of
shares outstanding - basic 52,006,548 51,379,542 50,763,566
------------ ------------ ------------
Weighted average number of
shares outstanding - diluted 52,006,548 51,379,542 50,832,904
------------ ------------ ------------



North American Palladium Ltd.
Consolidated Statements of Cash Flows
(expressed in thousands of Canadian dollars, except share and
per share amounts)
(unaudited)

Year ended December 31
2005 2004 2003
------------ ------------ ------------
Cash provided by (used in)
Operations
Net income (loss) for the year $ (53,611) $ (92,110) $ 38,378
Operating items not involving cash
Future income tax expense (3,286) 643 7,392
Amortization 18,340 36,710 28,590
Accrued interest on mine
closure deposit (74) (40) (63)
Write-down of mining interests - 108,000 2,315
Unrealized foreign exchange gain (1,433) (3,687) (18,519)
Loss on disposal of capital
assets - 277 788
Provision for asset retirement
costs 476 905 921
Write off of deferred financing
costs - 788 -
Stock based compensation 588 573 -
------------ ------------ ------------
(39,000) 52,059 59,802

Changes in non-cash working capital
- Note 12 29,587 29,731 (5,235)
------------ ------------ ------------
(9,413) 81,790 54,567
------------ ------------ ------------
Financing Activities
Repayment of long-term debt (6,798) (44,290) (45,134)
Increase in long-term debt - 36,809 -
Issuance of common shares 4,340 9,415 1,506
Mine restoration deposit (1,200) (1,200) (1,200)
Repayment of obligations under
capital leases (2,253) (1,751) (1,046)
Deferred financing costs - (504) -
------------ ------------ ------------
(5,911) (1,521) (45,874)
Investing Activities
Additions to mining interests (35,415) (28,728) (11,707)
Proceeds on disposal of mining
interests 15 451 114
Restricted cash equivalents - 1,813 3,314
------------ ------------ ------------
(35,400) (26,464) (8,279)
------------ ------------ ------------
Increase (decrease) in cash and
cash equivalents (50,724) 53,805 414
Cash and cash equivalents,
beginning of year 65,755 11,950 11,536
------------ ------------ ------------
Cash and cash equivalents,
end of year $ 15,031 $ 65,755 $ 11,950
------------ ------------ ------------



North American Palladium Ltd.
Notes to the Consolidated Financial Statements
for the years ended December 31, 2005, 2004 and 2003
(expressed in thousands of Canadian dollars, except share
and per share amounts)
(unaudited)

1. Basis of Presentation

These unaudited consolidated financial statements have been prepared
using disclosure standards appropriate for interim financial
statements and do not contain all the explanatory notes, descriptions
of accounting policies or other disclosures required by Canadian
generally accepted accounting principles for annual financial
statements. Such notes, descriptions of accounting policies and other
disclosures will be included in the Company's audited annual
consolidated financial statements included in the Company's annual
report to shareholders for the year ended December 31, 2005.
Accordingly, these unaudited consolidated financial statements should
be read in conjunction with the audited annual consolidated financial
statements for 2004.

2. Concentrate Awaiting Settlement

Concentrate awaiting settlement is comprised of:

2005 2004
----------- -----------
Concentrate awaiting settlement, gross $ 41,819 $ 76,491
Refining and smelter treatment charges (4,366) (8,232)
----------- -----------
Concentrate awaiting settlement, net $ 37,453 $ 68,259
----------- -----------

The gross value of concentrate awaiting settlement represents the
value of all PGMs and base metals from production shipped to and
received by the third-party smelters between June and December 2005,
including 65,905 ounces of palladium (2004 - including 114,186 ounces
of palladium).

3. Inventories

Inventories consist of the following:

2005 2004
----------- -----------
Concentrate $ 502 $ 587
Supplies 8,097 8,367
----------- -----------
$ 8,599 $ 8,954
----------- -----------

4. Mining Interests

Mining interests are comprised of the following:

2005 2004
----------- -----------
Plant and equipment, at cost $ 355,532 $ 344,412
Underground mine development, at cost 30,784 6,920
Accumulated amortization and impairment
charges 249,043 232,339
----------- -----------
137,273 118,993
----------- -----------

Equipment under capital lease, at cost 14,076 7,493
Accumulated amortization and impairment
charges 2,245 2,030
----------- -----------
11,831 5,463
----------- -----------

Mining leases and claims, royalty interest,
and development, at cost 82,561 82,537
Accumulated amortization and impairment
charges 72,142 70,984
----------- -----------
10,419 11,553
----------- -----------

----------- -----------
Mining interests, net $ 159,523 $ 136,009
----------- -----------

5. Obligations Under Capital Leases

The following is a schedule of future minimum lease payments under
capital leases together with the present value of the net minimum
lease payments:

2005 2004
----------- -----------
2005 $ - $ 1,632
2006 2,709 1,223
2007 2,380 951
2008 2,138 763
2009 1,761 452
2010 472 -
----------- -----------
Total minimum lease payments 9,460 5,021

Amounts representing interest at rates
from 3.5% - 8.3% 919 358
----------- -----------
Present value of minimum lease payments 8,541 4,663
Less current portion 2,323 1,481
----------- -----------
Long-term liabilities $ 6,218 $ 3,182
----------- -----------

6. Long-Term Debt

2005 2004
----------- -----------

Equipment finance company credit facility
consisting of Cdn$8,000 and US$14,000
(2004 - Cdn$10,000 and US$18,000) loans $ 24,324 $ 31,666
Less: current portion 6,664 6,815
----------- -----------
$ 17,660 $ 24,851
----------- -----------

On June 28, 2004, the Company entered into a US$20,000 and Cdn$10,000
senior credit facility with an equipment finance company. The
US$20,000 credit facility is repayable in equal quarterly
installments of US$1,000 commencing on September 30, 2004 and has a
final maturity on June 30, 2009. The Cdn$10,000 credit facility is
repayable in equal quarterly installments of Cdn$500 commencing
February 24, 2005 and has a final maturity of November 24, 2009. The
credit facility has an interest margin of 2.5% over 30 day LIBOR
rate. In return for granting the loan, the lender received a first
priority security in all of the Company's existing and future assets
excluding its production leases and claims. The credit facility
allows in certain circumstances, full repayment of outstanding loans
at any time during the term of the facility.

7. Kaiser-Francis Credit Facility

At the time the Company entered into the new senior credit facility,
certain terms under the US$20,000 non-revolving credit facility with
Kaiser-Francis Oil Company ("Kaiser-Francis") were amended. The
final maturity date was extended to June 30, 2006 from May 31, 2005
and the interest rate was reset based upon the 30 day LIBOR rate plus
2.50%. Amounts not drawn under the loan are subject to a standby fee
payable quarterly at 0.125% per annum. The Company paid on closing a
commitment fee of 0.75% of the total commitment (US$150). In
connection with the loan, the Company has granted Kaiser-Francis a
security interest in all of the assets of the Company and a pledge of
the LDI shares. The security interests in all of the assets of the
Company are subordinated to the security interests of the senior
credit facility (note 9). As at December 31, 2005, the outstanding
loan was US$11,500 (2004 - US$11,500).

The loan agreement includes customary representations, warranties and
covenants, including a covenant by the Company not to pay dividends
or make any other payment to shareholders while the loan is
outstanding. The loan agreement also provides for customary events of
default.

8. Capital Stock

The authorized capital stock of the Company consists of an unlimited
number of common shares and an unlimited number of special shares,
issuable in series, including 10,000,000 Series "A" preferred shares.

(a) Common Shares:
The changes in issued common share capital for the year are
summarized below:

2005 2004
-------------------------------------------------------------------------

Shares Amount Shares Amount
Common shares issued,
beginning of year 51,709,075 $ 322,904 50,895,338 $ 313,489
Common shares issued:
Pursuant to stock
options exercised 118,759 697 459,380 4,637
Fair value of stock
options exercised - 287 - -
To Group Registered
Retirement Savings
Plan participants 156,383 1,140 84,357 956
Private placement (net) 213,000 2,503 270,000 3,822
Tax effect of flow-through
shares - (1,939) - -
-------------------------------------------------------------------------
Common shares issued,
end of year 52,197,217 $ 325,592 51,709,075 $ 322,904
-------------------------------------------------------------------------

9. Commitments

(a) Palladium Sales Contract
In 2000, the Company entered into a contract (the "Palladium
Sales Contract") whereby the Company hedged the price of 100% of
its palladium production. Under the Palladium Sales Contract the
sales price was based on the monthly average spot price for
palladium, as determined by the London Metal Exchange P.M. Fix,
for the month prior to the month that the metal was received by
the customer, but the price was no less than US$325 per ounce
for 100% of the metal received and no more than US$550 per ounce
for 50% of the metal received. For the remaining 50% of the
metal received, there was no maximum price. The Palladium Sales
Contract's term commenced effective July 1, 2000 and expired on
June 30, 2005, and was not renewed.

(b) Sheridan Platinum Group of Companies ("SPG") Commitment
The Company is required to pay a royalty to SPG equal to 5% of
the Net Cash Proceeds, as defined in the agreement from mining
operations until the expiration of the Lac des Iles leases.

(c) Copper swap contracts
As at December 31, 2005, the Company had swap contracts for
330,693 lbs. of copper at an average fixed price of US$1.29 per
lb. maturing at various dates through March 2006. The fair value
of these swap contracts was below their carrying value by $240
as at December 31, 2005.

(d) Operating Leases and Other Purchase Obligations
As at December 31, 2005, the Company had outstanding operating
lease commitments and other purchase obligations of $1,053 and
$5,175, respectively (2004 - $1,818 and $4,222) all of which had
maturities of less than four years.

(e) Flow-through shares
To satisfy its commitments pursuant to the issuance of
flow-through shares, the Company is required to expense $2,503
of qualifying Canadian exploration expenses as defined in the
Income Tax Act (Canada) by December 31, 2006.

10. Revenue from Metal Sales

2005 2004 2003
----------- ----------- -----------
Palladium $ 38,621 $ 112,879 $ 109,443
Palladium forward contracts - - 20,437
Adjustments for mark-to-market 4,777 909 (1,163)
Nickel 16,041 25,735 26,010
Platinum 17,144 21,476 18,847
Gold 6,568 10,665 9,826
Copper 8,284 10,945 7,722
Other metals 1,171 2,595 1,019
----------- ----------- -----------
$ 92,606 $ 185,204 $ 192,141
----------- ----------- -----------

11. Income Taxes

The provision for income and mining taxes differs from the amount
that would have resulted by applying the combined Canadian Federal
and Ontario statutory income tax rates of approximately 38%.

2005 2004 2003
-----------------------------------
Income tax provision using
statutory income tax rates $ (21,524) $ (35,406) $ 18,147
Increase (decrease) in taxes
resulting from:
Write down of mining interests
not tax benefited - 35,694 -
Resource allowance 3,354 6,439 (3,342)
Non-taxable portion of capital
gains (162) (2) (2,908)
Losses not tax benefited 16,556 389 -
Increase in valuation allowance
on assets previously recognized - 2,525 -
Changes in income tax rates
and laws - - (3,546)
Benefit of income tax losses not
previously recognized - (437) (811)
Federal large corporations taxes 339 465 837
Ontario mining taxes (1,654) (7,979) 983
Other 209 102 (1,206)
-----------------------------------
Income tax expense $ (2,882) $ 1,790 $ 8,154
-----------------------------------

12. Statement of Cash Flows

The net changes in non-cash working capital balances related to
operations are as follows:

2005 2004 2003
-----------------------------------
Cash provided by (used in):

Concentrate awaiting settlement $ 30,806 $ 26,351 $ (9,298)
Inventories and stockpiles 3,484 1,786 3,179
Accounts receivable and other
assets (729) (229) 296
Accounts payable and accrued
liabilities (3,839) 2,613 1,218
Taxes payable (135) (790) (630)
-----------------------------------
$ 29,587 $ 29,731 $ (5,235)
-----------------------------------

13. Comparative Figures.

Certain of the prior years' figures have been reclassified to conform
to the presentation adopted in 2005.


Statement of Mineral Reserves (as of December 31, 2005)

Open Pit
-------------------------------------------------------------------------
Category Tonnes Pd Pt Au Cu Ni Pd Pt
(000) (g/t) (g/t) (g/t) (%) (%) (000 oz) (000 oz)
-------------------------------------------------------------------------
Proven Mineral
Reserves 8,584 2.03 0.22 0.16 0.07 0.06 560 60
Probable
Mineral
Reserves 4,970 2.31 0.23 0.17 0.07 0.07 369 37
-------------------------------------------------------------------------
Total Proven
and Probable
Mineral
Reserves 13,554 2.13 0.22 0.16 0.07 0.06 929 97
-------------------------------------------------------------------------

Underground
-------------------------------------------------------------------------
Category Tonnes Pd Pt Au Cu Ni Pd Pt
(000) (g/t) (g/t) (g/t) (%) (%) (000 oz) (000 oz)
-------------------------------------------------------------------------
Probable
Mineral
Reserves 3,542 6.62 0.40 0.34 0.07 0.08 754 46
-------------------------------------------------------------------------

Notes
1. CIM definitions for mineral reserves were used to estimate the
Lac des Iles mineral reserves.
2. Mineral reserves are calculated at a cut-off grade of 1.1 grams
and 4.5 grams of palladium per tonne for the open pit and for
the underground respectively, assuming an average long-term
palladium price of US$275 per ounce and includes by-product
metal credits
3. Graham G. Clow, P. Eng. and Luke Evans, M.Sc., P. Eng. of Roscoe
Postle Associates Inc., an independent geological mining engineering
consulting firm, are qualified persons under NI 43-101.
Messers. Clow and Evans prepared the open pit and underground
reserve estimate.
4. As of December 31, 2004 the RGO Stockpile was classified as
Proven Mineral Reserves. As of December 31, 2005 the RGO
Stockpile is being classified as Measured Mineral Resources because
at a grade of 0.97 grams per tonne palladium, it is below the current
open pit cut-off grade of 1.1 grams per tonne palladium.
5. Approximately 5.0 million tonnes averaging 1.94 grams per tonne
palladium was reclassified from Proven and Probable Mineral Reserves
to Measured and Indicated Mineral Resources due to a change in the
ultimate pit design. The ultimate pit design used in 2004 has been
changed to an interim ultimate pit design that addresses south pit
slope instability concerns. LDI is currently investigating
alternative designs and expects to complete a final ultimate
pit design later in 2006.


Statement of Mineral Resources (as of December 31, 2005)

Open Pit
-------------------------------------------------------------------------
Category Tonnes Pd Pt Au Cu Ni Pd Pt
(000) (g/t) (g/t) (g/t) (%) (%) (000 oz) (000 oz)
-------------------------------------------------------------------------
Measured
Mineral
Resources 21,375 1.38 0.17 0.11 0.05 0.06 948 117
Indicated
Mineral
Resources 7,626 1.86 0.21 0.13 0.06 0.05 456 51
-------------------------------------------------------------------------
Total
Measured and
Indicated
Mineral
Resources 29,001 1.51 0.18 0.11 0.05 0.06 1,404 168
-------------------------------------------------------------------------
Inferred
Mineral
Resources 185 2.72 0.18 0.13 0.05 0.04 16 1
-------------------------------------------------------------------------


Underground
-------------------------------------------------------------------------
Category Tonnes Pd Pt Au Cu Ni Pd Pt
(000) (g/t) (g/t) (g/t) (%) (%) (000 oz) (000 oz)
-------------------------------------------------------------------------
Indicated
Mineral
Resources 333 7.46 0.42 0.37 0.08 0.08 80 4
Inferred
Mineral
Resources 41 7.85 0.37 0.15 0.02 0.03 10 0
-------------------------------------------------------------------------

Notes
1. CIM definitions for mineral resources were used to estimate the
Lac des Iles mineral resources.
2. Resources are in addition to the reserves. Resources which are not
reserves do not have demonstrated economic viability.
3. Mineral resources are calculated at a cut-off grade of 1.1 grams
and 4.5 grams of palladium per tonne for the open pit and for the
underground respectively, assuming an average long-term palladium
price of US$275 per ounce and includes by-product metal credits.
4. Graham G. Clow, P. Eng. and Luke Evans, M.Sc., P. Eng. of
Roscoe Postle Associates Inc., an independent geological mining
engineering consulting firm, are qualified persons under
NI 43-101. Messers. Clow and Evans prepared the open pit and
underground resource estimate.

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