North American Palladium Ltd.
TSX : PDL
AMEX : PAL

North American Palladium Ltd.

November 14, 2006 17:04 ET

North American Palladium Reports Third Quarter of Improved Financial Results

TORONTO, ONTARIO--(CCNMatthews - Nov. 14, 2006) - North American Palladium Ltd. (TSX:PDL)(AMEX:PAL) -

Highlights

This news release contains forward-looking statements. Reference should be made to "Forward-looking Statements" at the end of this news release

- Revenues increased for the third consecutive quarter, more than doubling to $41.4 million compared with $17.2 million in the third quarter last year. Nine month revenues increased 62% to $108.4 million from $67.0 million for the comparable period in 2005

- Palladium production increased by 51% to 59,756 ounces at an average blended palladium mill feed grade of 2.20 g/t compared with last year's third quarter production of 39,532 ounces at a palladium grade of 1.47 g/t. The underground continued to achieve operational consistency, producing on average 2,189 tonnes per day at an average palladium grade of 5.98 g/t

- By-product metals revenue increased during the quarter to $21.7 million compared with $9.8 million last year reflecting higher overall production and commodity prices. By-product metals continue to provide a significant source of additional revenue to the Company's core palladium business

- Operating cash flow (before changes in non-cash working capital) during the quarter was $2.8 million versus negative $17.1 million in the third quarter of 2005 reflecting the higher production volumes and improved metal prices

- Cash cost per ounce of palladium produced, net of by-product metal, approached a two-year low of US$215 per ounce in the third quarter of 2006 compared with US$493 per ounce in the same quarter of 2005 and US$219 per ounce in Q2 2006

- Net loss for the three months was reduced to $11.2 million ($0.21 per share) from $19.6 million ($0.38 per share) a year earlier, while the net loss for the nine months was reduced by almost $16 million to $26.7 million ($0.51 per share) compared with that of the comparable period in 2005 of $42.6 million ($0.82 per share)

- Spot palladium prices in the third quarter averaged US$323 per ounce versus US$187 per ounce in the third quarter of 2005. With all its palladium production being sold into the spot market, the Company realized a weighted average cash price for palladium delivered during the quarter of US$328 per oz and US$319 per oz for the nine month period.

Results of Operations

The Company's financial performance strengthened for the third consecutive quarter this year reflecting increased palladium and by-product metal production at its Lac des Iles open-pit and underground operations and sustained high commodity prices. Revenues during the quarter more than doubled to $41.4 million compared with $17.2 million in the third quarter last year. Production from core palladium operations increased 51% to almost 60,000 ounces at an average palladium mill feed grade of 2.20 g/t, compared with nearly 40,000 ounces produced in Q3 2005 at a palladium grade of 1.47 g/t. Total by-product metal production also rose during the quarter: platinum (+23% to 5,612 oz); gold (+26% to 4,313 oz); nickel (+55% to 621,287 lbs); while copper declined 10% to 1,261,765 lbs reflecting lower copper ore grades.

The Company currently delivers and sells all of its palladium production into the spot market. During the third quarter of 2006, spot palladium prices averaged US$323 per ounce. Palladium revenue for the quarter was recognized at the quoted September 30th price of US$313 per ounce, compared with US$187 per ounce in the comparative period of 2005 and US$310 per ounce in the second quarter of 2006. Nickel and copper, which collectively account for about 32% of total revenues, retained much of their multi-year highs closing the quarter at US$14.29 and US$3.45 per pound respectively. Total revenues for the first nine months of 2006 increased 62% to $108.4 million from $67.0 million for the comparable period in 2005, already exceeding that for the entire 2005 fiscal year. The Company's profitability remains highly levered to commodity price movements as no hedging instruments are currently in place on any of its metal production.

The consistent performance of the underground operations, having generated two full quarters of production since April 1st of this year, has had a substantial impact on improved production. During the quarter, 201,363 tonnes of ore was extracted from the underground mine with 205,513 tonnes (approximately 2,200 tonnes per day) being processed by the mill at an average grade of 5.98 g/t palladium. Production from the open pit in the period totalled 3,033,933 tonnes compared with 3,468,577 tonnes for the corresponding period in 2005 as open pit production was synchronized with the underground production to provide a consistent mill feed grade. Despite the lower tonnage, a strong improvement in the waste to ore strip ratio of 1.98:1 compared with 3.54:1 in the third quarter of 2005, together with improved palladium recovery of 72.7% in the latest quarter from 62.9% last year contributed to higher palladium production. Mill availability improved during the third quarter to 87.3% compared with the second quarter of 83.1%, but was marginally below the 91.7% availability in the third quarter of 2005.

Reflecting the increase in production together with continued strength in by-product metal prices, the cash cost per unit, net of by-product metals, declined to US$215 per ounce in the third quarter of 2006 compared with US$493 per ounce in the same quarter of 2005 and US$219 per ounce in Q2 2006. This was partially offset by ongoing upward pressure on operating costs particularly relating to power, diesel fuel and tires.

As a result of the foregoing, the net loss realized in the third quarter of 2006 was significantly reduced to $11.2 million ($0.21 per share) from the net loss in the comparable quarter last year of 19.6 million ($0.38 per share). For the nine month period this year, a net loss of $26.7 million ($0.51 per share) compared with that for the comparable period in 2005 of $42.6 million ($0.82 per share).



Selected Quarterly Financial Results

Third Quarter Nine Months
('000's $ except per share amounts) 2006 2005 2006 2005

Total Revenue from Metal Sales 41,431 17,247 108,442 66,997
Palladium 19,743 7,469 51,459 29,455
Platinum 5,763 3,569 17,794 13,170
Gold 2,403 1,313 6,643 5,004
Copper 4,186 2,005 11,531 6,154
Nickel 9,075 2,723 20,244 12,246
Other 261 168 771 968

Net Income (Loss) (11,247) (19,610) (26,713) (42,574)
Net Income (Loss) per share (0.21) (0.38) (0.51) (0.82)

Operating Cash flow (i) 2,758 (17,105) (708) (30,968)
Cash Cost per ounce (US$) 215 493 243 344
Wtd Avg shares o/s 52,754 52,108 52,449 51,950

(i) (before changes in non-cash working capital)


Non-cash amortization in the third quarter of 2006 increased to $9.0 million compared with $4.6 million in the comparable quarter of 2005, reflecting the 51% increase in palladium production as well as the amortization of underground development costs which commenced in April 2006.

The reduction in the loss from mining operations in third quarter 2006 to $6.0 million from that reported in the same period last year of $20.1 million was primarily the result of improved production and metal prices. Included in the 2006 results was a $3.9 million (third quarter $1.1 million) exploration expenditure on the Arctic Platinum Project which the Company continues to pursue in Finland. Exploration costs associated with the project are being charged to exploration expense as incurred until it is determined that the project can be economically developed, at which time they will begin to be capitalized.

Other expenses totaled $5.3 million for the quarter compared to income of $0.1 million in the third quarter last year, the increase largely resulting from the recognition of non-cash accretion expenses of $3.7 million relating to the convertible notes payable issued in 2006. The Company incurred interest expense during the quarter on long-term debt of $1.5 million compared with $0.6 million in the third quarter of 2005. The increased interest expense in the current year relates to higher interest rates year-over-year as well as the additional interest expense on the convertible notes payable that commenced in April, 2006.

The significant improvement in operating cash flow (before changes in non-cash working capital) during the quarter of $2.8 million, compared with cash used in operations of $17.1 million in the third quarter of 2005, was attributable to the higher production volume and improved metal prices in 2006. Changes in non-cash working capital used in the third quarter of 2006 of $3.4 million compared with providing $5.9 million in third quarter 2005 reflected an increase in palladium awaiting settlement to 108,346 ounces at September 30, 2006 (including underground preproduction) compared with 65,905 ounces at December 31, 2005. The increase in the physical quantity of metal in the concentrate awaiting settlement, combined with the stronger by-product metal prices resulted in an 8% increase in the value of concentrate awaiting settlement during the third quarter 2006 of $4.9 million ($27.6 million increase year-to-date). After allowing for non-cash working capital changes, cash used by operations was $0.6 million in the third quarter of 2006, compared with $11.2 million used in the third quarter of 2005.

Investing activities required $4.1 million of cash in the third quarter of 2006, the majority of which relates to the ongoing lateral development for the underground mine and the 2006 expansion of the tailings management facilities. This compares with $9.5 million of net investing activities, primarily on underground mine development in the corresponding period of 2005.

On October 12, 2006, the Company closed a transaction with KFOC, its significant shareholder, for a US$5 million short-term working capital loan maturing December 31, 2006. The interest rate under the loan is the 30 day Libor plus 2.5% per annum. In connection with the loan, the Company granted to KFOC a first priority security interest in the inventory and receivables of the Company. As at November 13, 2006, the Company had not drawn down on the loan facility.

As at September 30, 2006, the Company had cash of approximately $9.4 million and working capital of $56 million. The Company believes it will need to raise additional working capital to fund its expected operations over the next twelve months as the inventory of concentrate awaiting settlement increases and as the lateral development of the underground mine continues. The Company is reviewing various options to raise the additional funds required.

Outlook

As at September 30, 2006, the Company produced a total of 164,097 ounces of palladium, its principal metal, compared with 140,334 ounces produced in the same period in 2005. The Company expects production for the remainder of 2006 will be in line with expectations.

Cash costs per ounce of palladium for the remainder of 2006 and early 2007 are expected to continue to be significantly lower than that reported in 2005, benefiting from anticipated improvements in the overall blended mill feed grade and mill performance as well as stronger by-product metal prices. The cash costs reported in the second and third quarters of this year have been approaching two-year lows.

During the first quarter of this year, the ultimate pit design implemented in 2004 was changed to an interim pit design that addressed previously disclosed south pit wall instability issues. The Company engaged an independent geotechnical consultant to review the slope stability issues and his recommendations have been used in designing a reconfigured open pit mining plan. The Company commenced a detailed review of its life-of-mine operating plan for the Lac des Iles mine. At this time, the most likely mine plan to be adopted is being reviewed and the carrying value of the Company's mining interests has been reviewed based upon this likely mine plan. The Company's management believes an impairment charge and a corresponding reduction in the carrying value of its mining interests is not required.

The Company's exploration program continues to be focused on further advancing the known mineral deposits or occurrences at the APP in Finland and on further definition of the Offset High Grade Zone at Lac des Iles and the Shebandowan nickel project. In addition, the pursuit of quality Ni/PGM opportunities will continue to be a key strategy.

The fundamentals for a robust and sustainable palladium market have already taken shape. The emergence of the palladium jewellery market appears to have absorbed much of the supply surplus creating relative elasticity as evidenced by palladium's recent resilience amid market volatility. Platinum and palladium are relative substitutes. As such, consumers particularly in the jewellery and autocatalyst sectors are expected to exploit the excessive price differentials. As increasing global emissions legislation and technology for alternative energy sources secure the ongoing value of PGM's in preserving our environment, the outlook for palladium's sustainable growth is positive.

Conference Call revised date - Thursday, November 16, 2006 at 8:30 am EDT

Please take note that the Company will host its third quarter conference call at 8:30 am EDT on Thursday, November 16, 2006 (in lieu of Friday, November 17). All dial-in numbers remain the same. The toll-free conference call dial-in number is 1-877-461-2816 and the local and overseas dial-in number is 416-695-5261. 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 December 4, 2006; toll-free at 1-888-509-0081; locally and overseas at 416-695-5275, passcode #634584.

Forward-Looking Statements

Securities laws encourage companies to disclose forward-looking information so that investors can obtain a better understanding of the company's future prospects and make informed investment decisions. This press release contains forward-looking statements within the meaning of the "safe harbor" provisions of the United States Private Securities Litigation Reform Act of 1995 and any applicable Canadian securities legislation, including the Securities Act (Ontario), relating to our objectives, plans, strategies, financial condition and results of operations. Forward-looking statements may include words such as "expect", "will", "continue", "believe", "outlook", "anticipated" and other similar expressions, as they relate to the Company or its management, are intended to identify forward-looking statements.

It is important to note that: (1) unless otherwise indicated, forward-looking statements indicate our expectations as at November 13, 2006; (2) our actual results may differ materially from our expectations if known and unknown risks or uncertainties affect our business, or if estimates or assumptions prove inaccurate; (3) we cannot guarantee that any forward-looking statement will materialize and, accordingly, you are cautioned not to place undue reliance on these forward-looking statements; and (4) we disclaim any intention and assume no obligation to update or revise any forward-looking statement even if new information becomes available, as a result of future events or for any other reason.

In making the forward-looking statements in this news release, the Company has applied several material assumptions, including but not limited to, the assumption that:
(1) market fundamentals will result in increased palladium demand and prices and sustained by-product metal demand and prices; (2) the integrated operation of the underground mine and the open pit mine remain viable operationally and economically; (3) financing is available on reasonable terms; (4) expectations for blended mill feed head grade and mill performance will proceed as expected; (5) new mine plan scenarios will be viable operationally and economically; and (6) plans for improved mill production, for sustainable recoveries from the Lac des Iles mine, for further exploration at the Lac des Iles mine, and surrounding region, and for exploration in Finland will proceed as expected. Important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements include, among others: (1) metal price volatility; (2) economic and political events affecting metal supply and demand; (3) fluctuations in ore grade or ore tonnes milled; (4) geological, technical, mining or processing problems; (5) future production; and (6) changes in the life-of-mine plan. For a more comprehensive review of risk factors, please refer to the "Risks and Uncertainties" section of the Company's most recent interim Management's Discussion and Analysis of Financial Results and 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 Canadian securities regulatory authorities.

North American Palladium's Lac des Iles Mine is Canada's only primary producer of platinum group metals and is among the largest open-pit/underground palladium mining operations in the world. The Mine also generates substantial revenue from platinum and by-product metals including nickel, gold and copper. NAP is focused on expanding its production profile through joint ventures in Canada and the Arctic Platinum Joint Venture in Finland. Palladium's catalytic qualities are expected to play an increasing role in the automotive industry in response to growing concern for global environmental solutions, in fuel cell technology for alternative energy sources and a burgeoning jewellery market, while continuing to have widespread application in the dental, electronics and chemical sectors.

Additional information is available in the Company's interim MD&A filed on its website and on www.sedar.com.



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

September 30 December 31
2006 2005
------------- ------------
(unaudited)

Assets
Current Assets
Cash and cash equivalents - Note 7 $ 9,361 $ 15,031
Concentrate awaiting settlement,
net - Note 2 65,079 37,453
Inventories 9,346 8,599
Crushed and broken ore stockpiles
- Note 3 6,587 7,267
Other assets 2,251 2,344
------------- ------------
92,624 70,694

Mining interests, net 153,722 159,523
Mine restoration deposit - Note 4 7,931 7,247
Crushed and broken ore stockpiles - Note 3 277 239
Deferred financing costs 1,170 654
------------- ------------
$ 255,724 $ 238,357

Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable and accrued liabilities $ 16,267 $ 16,392
Taxes payable 315 386
Current portion of obligations under
capital leases 2,096 2,323
Current portion of long-term debt - Note 5 6,461 6,664
Current portion of convertible notes
payable - Note 6 11,450 --
Kaiser Francis credit facility - Note 5 -- 13,407
------------- ------------
36,589 39,172

Mine restoration obligation 8,132 7,894
Obligations under capital leases 4,407 6,218
Long-term debt - Note 5 12,307 17,660
Convertible notes payable - Note 6 28,315 --
Future mining tax liability -- 202
------------- ------------
89,751 71,146

Shareholders' Equity
Common share capital and common share
purchase warrants - Note 7 338,456 325,592
Equity component of convertible notes
payable, net of issue costs - Note 6 12,337 --
Contributed surplus 1,148 874
Deficit (185,968) (159,255)
------------- ------------
165,973 167,211
------------- ------------
$ 255,724 $ 238,357
------------- ------------



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

Three months Nine months
ended ended
September 30 September 30
2006 2005 2006 2005
------------- ------------ ------------ ------------

Revenue from metal
sales - Note 9 $ 41,431 $ 17,247 $ 108,442 $ 66,997
Operating expenses
Production costs,
excluding
amortization and
asset retirement
costs 30,305 25,639 82,905 75,048
Smelter treatment,
refining and
freight costs 3,999 3,791 10,950 12,788
Amortization 9,004 4,597 20,139 14,104
Administrative 1,462 1,508 5,225 4,895
Exploration expense 2,576 1,721 7,259 4,226
Loss on disposal
of equipment -- 6 194 6
Asset retirement
costs 134 119 389 365
------------- ------------ ------------ ------------
Total operating
expenses 47,480 37,381 127,061 111,432
------------- ------------ ------------ ------------

Loss from mining
operations (6,049) (20,134) (18,619) (44,435)
------------- ------------ ------------ ------------

Other expenses
(income)
Accretion expense
relating to
convertible notes
payable - Note 6 3,692 -- 6,152 --
Interest expense 1,503 632 3,621 1,878
Foreign exchange
loss (gain) 74 (346) (600) (200)
Amortization of
deferred financing
costs 223 11 378 32
Write-off of
deferred financing
costs -- -- 504 --
Interest income (146) (408) (609) (1,336)
------------- ------------ ------------ ------------
Total other expenses
(income) 5,346 (111) 9,446 374
------------- ------------ ------------ ------------

Loss before income
taxes (11,395) (20,023) (28,065) (44,809)
Income tax expense
(recovery) (148) (413) (1,352) (2,235)
------------- ------------ ------------ ------------
Loss for the period (11,247) (19,610) (26,713) (42,574)

Deficit, beginning
of period (174,721) (128,608) (159,255) (105,644)
------------- ------------ ------------ ------------
Deficit, end of
period $ (185,968) $ (148,218) $ (185,968) $ (148,218)
------------- ------------ ------------ ------------

Loss per share
Basic $ (0.21) $ (0.38) $ (0.51) $ (0.82)
------------- ------------ ------------ ------------
Diluted $ (0.21) $ (0.38) $ (0.51) $ (0.82)
------------- ------------ ------------ ------------

Weighted average
number of shares
outstanding
Basic 52,754,112 52,108,303 52,448,659 51,950,315
------------- ------------ ------------ ------------
Diluted 52,754,112 52,108,303 52,448,659 51,950,315
------------- ------------ ------------ ------------



North American Palladium Ltd.
Consolidated Statements of Cash Flows
(expressed in thousands of Canadian dollars)
(unaudited)

Three months Nine months
ended ended
September 30 September 30
2006 2005 2006 2005
------------- ------------ ------------ ------------

Cash provided by
(used in)
Operations
Loss for the period $ (11,247) $ (19,610) $ (26,713) $ (42,574)
Operating items
not involving cash
Accretion expense
relating to
convertible
notes payable 3,692 -- 6,152 --
Amortization 9,004 4,597 20,139 14,104
Amortization of
deferred financing
costs 223 11 378 32
Accrued interest
on convertible
notes 547 -- 942 --
Accrued interest
on mine
restoration deposit -- -- (84) --
Unrealized foreign
exchange (gain) loss 10 (2,242) (2,758) (1,589)
Loss on disposal
of equipment -- 6 194 6
Asset retirement
costs 134 119 389 365
Future income tax
expense (recovery) (139) (507) (1,269) (2,714)
Write-off of
deferred financing
costs -- -- 504 --
Stock based
compensation and
employee benefits 534 521 1,418 1,402
------------- ------------ ------------ ------------
2,758 (17,105) (708) (30,968)

Changes in non-cash
working capital
- Note 8(a) (3,406) 5,885 (27,507) 33,156
------------- ------------ ------------ ------------
(648) (11,220) (28,215) 2,188
------------- ------------ ------------ ------------

Financing Activities
Issuance of
convertible notes -- -- 41,037 --
Increase in long
term debt and
credit facility -- -- 2,311 --
Deferred financing
costs -- -- (2,364) --
Issuance of
common shares 33 34 3,953 3,073
Repayment of
long-term debt (1,611) (1,678) (4,906) (5,133)
Repayment of
obligations under
capital leases (555) (567) (1,730) (1,673)
Mine restoration
deposit -- (300) (600) (900)
------------- ------------ ------------ ------------
(2,133) (2,511) 37,701 (4,633)
------------- ------------ ------------ ------------

Investing Activities
Additions to mining
interests (4,072) (9,504) (15,156) (23,295)
------------- ------------ ------------ ------------

Decrease in cash
and cash equivalents (6,853) (23,235) (5,670) (25,740)
Cash and cash
equivalents,
beginning of period 16,214 63,250 15,031 65,755
------------- ------------ ------------ ------------
Cash and cash
equivalents, end
of period $ 9,361 $ 40,015 $ 9,361 $ 40,015
------------- ------------ ------------ ------------

Supplementary information - Note 8(b) and (c)



North American Palladium Ltd.

Notes to the Consolidated Financial Statements
For the nine months ended September 30, 2006
(expressed in thousands of Canadian dollars
except per share and per ounce 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 are 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 2005.

Life-of-Mine Plan Review and Measurement Uncertainty of Mining Interests

During the first quarter of 2006, the ultimate pit design implemented in 2004 was changed to an interim pit design that addressed previously disclosed south pit wall instability issues. The Company engaged an independent geotechnical consultant to review the slope stability issues and his recommendations have been used in designing a reconfigured open pit mining plan. The Company commenced a detailed review of its life-of-mine operating plan for the Lac des Iles mine, the Company's only operating mine. At this time, the most likely mine plan to be adopted is being reviewed and the carrying value of the Company's mining interests has been reviewed based upon this likely mine plan and the Company's management believes an impairment charge and a corresponding reduction in the carrying value of its mining interests is not required.

Arctic Platinum Project

On October 18, 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 APP includes several advanced stage PGM Projects. The Company has been granted an option to earn up to a 50% interest and, in certain circumstances, a 60% interest in APP and will become the project operator. In order to exercise the option, the Company must spend US$12,500, complete a feasibility study and make a production decision, as well as paying Gold Fields up to US$45,000 (for a 60% interest) through the issuance of the Company's common shares (approximately 9.2 million shares) on or before August 31, 2008. The formal agreement governing the joint venture was signed on March 24, 2006. As at September 30, 2006, the Company has incurred $3,891 (US$3,489) in expenditures on the APP and these costs have been charged to exploration expense.

2. Concentrate Awaiting Settlement

The gross value of concentrate awaiting settlement represents the value of platinum group metals and base metals from production shipped to and received by third-party smelters between March 2006 and September 2006, which are in-process at the balance sheet date. At September 30, 2006, concentrate awaiting settlement included 108,346 ounces of palladium (December 31, 2005 - 65,905) of which 4,850 ounces of the 9,004 ounces of pre-production from the underground mine which is not recognized as revenue but as a reduction of the cost to develop the underground mine. Concentrate awaiting settlement is revalued and adjusted at each reporting period to reflect changes in metal prices and foreign exchange rates. Concentrate awaiting settlement was entirely from two domestic customers at September 30, 2006 and the Company expects full realization will occur on such receivables.

3. Crushed and Broken Ore Stockpiles

Crushed and broken ore stockpiles are valued at the lower of average production cost and estimated net realizable value. Crushed and broken ore stockpiles represent coarse ore that has been extracted from the mine and is available for further processing. The amount of stockpiled ore that is not expected to be processed within one year is shown as a long-term asset.

4. Mine Restoration Deposit

The Company has established a mine closure plan for the eventual clean-up and restoration of the mine site in conjunction with the Ontario Ministry of Northern Development and Mines (the "Ministry"), which requires a total amount of $7,802 to be accumulated in a Trust Fund controlled by the Ministry. At September 30, 2006, the Company had $7,931 on deposit with the Ministry which includes accrued interest of $401 and is not required to make further contributions to the Trust Fund. The funds on deposit bear interest at current short-term deposit rates.

5. Long-Term Debt and Credit Facility

The Company's long-term debt, is comprised of a senior credit facility with an equipment finance company. The interest rate under the loan facility is LIBOR plus 250 basis points, or 7.87% at September 30, 2006. As at September 30, 2006, the outstanding long-term debt, including current and long-term portions was $18,768 The senior credit facility is repayable in equal quarterly installments over a five-year period with a final maturity of November 24, 2009.

Kaiser-Francis Oil Company's ("KFOC"), the Company's significant shareholder, credit facility maturing on June 30, 2006 was repaid on June 23, 2006 pursuant to the terms of the Series II convertible note issued on that date (also refer to Note 6).

On October 12, 2006 the Company closed a transaction with KFOC for a US$5 million short-term working capital loan maturing December 31, 2006. The interest rate under the loan is the 30 day Libor plus 2.5% per annum. The Company paid a commitment fee of US$37,500 and amounts not drawn under the loan are subject to a standby fee of 0.125% per annum. In connection with the loan, the Company granted to KFOC a first priority security interest in the inventory and receivables of the Company. As at November 13, 2006, the Company had not drawn down on the loan facility.



6. Convertible Notes Payable

September
30, 2006
--------------

Series I convertible notes (principal amount US$35 million,
maturing August 1, 2008) $ 27,966
Series II convertible notes (principal amount US$13.5
million, maturing December 1, 2008) 11,799
--------------
39,765
Less: current portion (11,450)
--------------
$ 28,315
--------------


On March 29, 2006, the Company issued US$35,000 (C$41,037) aggregate principal amount of Series I convertible notes (the "Series I Notes") due August 1, 2008 through a private placement of convertible notes and common share purchase warrants. The offering (the "Offering") consists of up to US$58,500 principal amount of notes. The Offering was to KFOC and an institutional investor (the "Purchasers"). The Offering is governed by a securities purchase agreement dated March 24, 2006 (the "SPA") among the Company and the Purchasers.

The Series I Notes are convertible into 2,873,563 common shares of the Company at any time by the holder at US$12.18 per share. Warrants exercisable to purchase 1,436,782 common shares were issued with the Series I Notes, each warrant being exercisable to purchase one common share at an exercise price of US$13.48 until March 29, 2010.

The Company, at its option, had the right to sell to KFOC up to US$13,500 principal amount of Series II Notes (a second tranche) on or before June 30, 2006, which would be used to repay the loan under the existing KFOC credit facility (refer to note 5). On June 23, 2006, the Company exercised this right and issued to KFOC US$13,500 aggregate principal amount of Series II Notes, due December 1, 2008. The Series II Notes are convertible into 1,108,374 common shares of the Company at any time by the holder at US$12.18 per share. Warrants exercisable to purchase 554,187 common shares were issued with the Series II Notes, with each warrant being exercisable to purchase one common share at an exercise price of US$13.48 until June 23, 2010.

The Purchasers have the option to acquire an additional US$10,000 principal amount of notes (a third tranche) on or before December 31, 2006.

The Series I and II Notes bear interest at a rate of 6.5% per annum payable bi-monthly, commencing on June 1, 2006 and August 1, 2006, respectively. Series I and II Notes are repayable in nine equal installments commencing April 1, 2007 and August 1, 2007, respectively. The interest payments and/or repayment amounts may be paid to each Purchaser, at the Purchaser's option, in any combination of cash and/or common shares. If common shares are issued for interest payments or in repayment of the convertible notes they will be issued at a 10% discount from the weighted average trading price of the common shares on the AMEX for the five consecutive trading days immediately prior to applicable payment date.

Commencing June 29, 2007 for Series I and September 23, 2007 for Series II, if the weighted average trading price of the common shares for each of any 25 consecutive trading days is 150% or more of the conversion price, the Company will have the right to force the Purchasers to convert all or any of the outstanding principal amount of the convertible notes at the conversion price.

The convertible notes contain customary covenants, including restrictions on the Company incurring debt or obligations for or involving the payment of money in excess of certain restricted amounts. The convertible notes are unsecured but contain customary anti-dilution protection as well as adjustments in the event that the Company issues common shares or securities convertible into common shares at a purchase price per common share less than the conversion price. The warrants contain similar anti-dilution protection.

Under Canadian GAAP, the components of the convertible notes must be bifurcated and accounted for separately as debt and equity instruments. The warrants are separable from the notes and are accounted for as an equity instrument. The Series I proceeds received were allocated to the debt and equity components of the notes and to the initial warrants on a relative fair value basis as follows: US$20,558 to the debt, US$8,808 to the equity component and US$5,634 to the warrants. The Series II Notes proceeds were allocated as follows: US$9,578 to the debt, US$2,312 to the equity component and US$1,610 to the warrants. In addition, a liability (the "Equity Premium") was recognized for the holders' option to receive common shares, in lieu of cash, at a 10% discount to the five day weighted trading price, as described above, for interest and principal payments. The Company will be required to accrete the carrying value of the convertible notes and the Equity Premium such that at each installment payment date, the carrying value of the notes and the Equity Premium will be equal to the face value of the notes and the liability related to the Equity Premium. The Company recorded accretion expense of $3,692 during the three months ended September 30, 2006 of which $910 represented the accretion relating to the Equity Premium which was included in the carrying value of the convertible notes payable as at September 30, 2006.

The fair value of the debt was determined based on the future payments of principal and interest for a debt instrument of comparable maturity and credit quality, excluding any conversion option by the holder. The Series I Notes carry an effective interest of 42%. The Series II Notes carry an effective interest rate of 28%.

The conversion option or equity component of the Notes was valued using a Binomial model. The fair value of the warrants was determined based on the Black-Scholes option pricing model. The models used in the valuation of the components of the convertible debt contain certain subjective assumptions, changes of which can cause significant variation in the estimated fair value of the debt and equity components of the notes.

The estimated issue costs of $2,364 have been allocated pro-rata to the debt ($1,398) and equity components ($589) of the Series I and II Notes and to the associated warrants ($377) on a relative fair value basis. The financing costs related to the debt components will be amortized on an effective yield basis over the term of the convertible notes.

7. Common Share Capital and Common Share Purchase Warrants

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 and common share purchase warrants:

September 30, 2006
Shares Amount
---------------------
Common shares issued, beginning of period 52,197,217 $ 325,592
Common shares issued:
Pursuant to stock options exercised 130,088 907
Fair value of stock options exercised - 146
To group registered retirement savings
plan participants 79,130 852
For interest payments on convertible notes
payable 110,484 943
Private placement - flow through shares
(net) 270,000 3,045
Tax effect of flow-through shares - (1,067)
---------------------
Common shares issued, end of period 52,786,919 330,418
---------------------

Common share purchase warrants - Note
7b
Balance, beginning of period - -
Issued pursuant to terms of Series I
convertible notes, net of issue costs 1,436,782 6,238
Issued pursuant to terms of Series II
convertible notes, net of issue costs 554,187 1,800
---------------------
1,990,969 8,038
---------------------
Balance, end of period $ 338,456
---------------------


The Company finances a portion of its exploration activities through the issue of flow through shares. Under the terms of these share issues, the tax attributes of the related expenditures are renounced to subscribers. At the time the Company renounces the tax attributes of the expenditures to the subscribers, share capital is reduced and future tax liabilities are increased by the estimated income tax benefits renounced. In June 2006, the Company issued 270,000 flow-through shares for gross proceeds of $3,300 which must be spent on qualifying expenditures prior to December 31, 2007. As at September 30, 2006, the Company has spent $693 on qualifying expenditures.

(b) Common Share Purchase Warrants

Pursuant to the terms of the securities purchase agreements governing the issue of the convertible notes payable, warrants to purchase 1,990,969 common shares were issued and are outstanding as follows:



Number of Exercise Expiry
Warrants Price Date
------------- ----------- -----------------
1,436,782 US$13.48 March 29, 2010
554,187 US$13.48 June 23, 2010


(c) Restricted Share Unit Plan

Effective December 14, 2005, the Company adopted a Restricted Share Unit Plan under which eligible directors, officers and key employees of the Company are entitled to receive awards of restricted share units. Each restricted share unit means an equivalent in value to the fair market value of a common share of the Company on the date of the award. As at September 30, 2006, 40,000 restricted share units are outstanding. The fair value of the restricted share units as at September 30, 2006 is $8.10 per unit and $140 has been charged to compensation expense for the nine months ended September 30, 2006.

(d) Corporate Stock Option Plan



The following summary sets out the activity in outstanding common share
stock options for the nine months ended September 30, 2006:

September 30, 2006
---------------------
Weighted-
Average
Exercise
Shares Price
--------- ---------
Outstanding, beginning of period 563,638 $ 11.09
Granted 65,000 8.15
Exercised (130,088) 6.97
Cancelled (131,450) 13.22
--------- ---------
Outstanding, end of period 367,100 $ 10.25
--------- ---------
Options exercisable, end of
period 132,967 $ 10.97
--------- ---------


The Company recognized a stock based compensation expense of $457 for the nine months ended September 30, 2006 (2005 - $508).

8. Statement of Cash Flows



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

Three Months Nine Months
ended ended
September 30 September 30
2006 2005 2006 2005
------------------ ------------------
Cash provided by (used in):
Concentrate awaiting settlement $(4,908) $5,431 $(27,626) $35,116
Inventories and stockpiles 569 1,084 368 652
Other assets (746) (1,261) 93 (581)
Accounts payable and accrued
liabilities 1,493 117 (271) (2,000)
Taxes payable 186 514 (71) (31)
------------------ ------------------
$(3,406) $5,885 $(27,507) $33,156
------------------ ------------------


(b) On June 23, 2006, the Company, in a non cash transaction, issued Series II convertible notes with an aggregate principal value of US$13,500 to KFOC to repay the US$13,500 outstanding under the credit facility with KFOC, due to mature on June 30, 2006 (also refer to Note 6).

(c) During the nine months ended September 30, 2006, mining interests were acquired at an aggregate cost of $15,156 (2005 - $29,886).



9. Revenue from Metal Sales
Three Months Nine Months
ended ended
September 30 September 30
2006 2005 2006 2005
---------------- ----------------
Palladium $ 18,398 $ 7,734 $ 47,674 $ 29,036
Adjustments for mark-to-market 1,345 (265) 3,785 419
Nickel 9,075 2,723 20,244 12,246
Platinum 5,763 3,569 17,794 13,170
Gold 2,403 1,313 6,643 5,004
Copper 4,186 2,005 11,531 6,154
Other metals 261 168 771 968
------ ------- ------- --------
$ 41,431 $ 17,247 $ 108,442 $ 66,997
------ ------- ------- --------


10. Commitments

The Company enters into forward contracts from time to time to hedge the effects of changes in the prices of metals it produces and foreign exchange on the Company's revenues. Gains and losses realized on derivative financial instruments used to mitigate metal price risk are recognized in revenue from metal sales when the hedge transaction occurs. Currently, the Company does not have any contracts in place.

11. Comparative Period Figures

Certain prior period amounts have been reclassified to conform to the classification adopted in the current period.

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