As a result of North American Palladium Ltd. being acquired by Impala Platinum Holdings we are discontinuing coverage. All our previous estimates, should no longer be relied upon.
The recent rally in precious metals (gold up 12.7% QoQ and silver up 13.9% QoQ– Figure 2) is going to be reflected in Q3 results when reporting starts for precious metals miners on October 30 (Figure 3). While strong commodity prices have already buoyed stocks, we expect a further rally for producers going into Q3 financial results as strong metals prices should drive Q3 estimates higher, indicating improved QoQ financial performance ahead of results. While we believe all of our producers under-coverage are poised for a strong quarter, our top pick is RNC Minerals (TSX:RNC, FV est. C$1.00) as we expect strong production results to translate into positive operating cash flow for the first time in 2019.
Impact: Positive
North American Palladium announced today that it has entered a definitive agreement to be acquired by Impala Platinum (JSE:IMP) for C$1.0 billion. With minority shareholders receiving C$19.74/sh and Brookfield (hold 81% of North American Palladium) receiving C$16.00/sh for a weighted average price of C$16.77/sh. For minority shareholders, this represents a 27% return plus 3.7% in dividends paid from when we published our initial estimates in February. This represents a significant discount to our prior fair value estimate of C$28/sh suggesting there is still room for a higher bid; however, we believe a higher bid is less probable.
If it looks like a bull market (technical breakout in gold), smells like a bull market (significant negative yielding debt) and feels like a bull market (funds flowing into gold), it must be a bull market. Our analysis shows that equities in smaller sized companies outperform during a bull market. However, not all junior miners are created equal, and we believe there are three keys to picking them.
Impact: Positive
North American Palladium released solid Q2/19 results and announced a special dividend of C$0.35/sh. We think the special dividend is an important signal of confidence to the market. We believe that improved operating performance QoQ, the underground expansion being on-track and continued strength in the palladium price, could result in a special dividend becoming a regular occurrence. We are maintaining our C$25/sh fair value estimate and believe the company’s ability to generate FCF and thus, return capital to shareholders, should drive the stock higher.
Impact: Positive
North American Palladium has released drill results that have identified higher-grade near surface zones at it’s Lac des Iles Mine in Ontario, which with further drilling have the potential to increase our estimates. With continued operational execution and exploration success, we believe that North American Palladium’s share price should re-rate to better reflect its exceptional ability to generate FCF.
Second quarter reporting begins on July 24 and the recent gold rally is likely to have a muted impact on Q2/19 financial results. However, companies with solid operating performance should generate additional share price momentum as the market starts to project the full impact of the increase in the commodity prices and operating performance (Figure 2). We believe that two companies poised to deliver strong operating performance, into the improving commodity price environment are Gran Colombia (TSX:GCM, FV est. C$6.00) and North American Palladium (TSX:PDL, FV est. C$25.00).
North American Palladium has released positive Q1/19 results that beat our FCF estimates, despite some operational hiccups. More importantly, management had the confidence to boost its dividend to $0.10/sh (was $0.03/sh). While operational challenges impacted the quarter, the company was able to fully repay its debt and had the confidence to more than triple its dividend. This is expected to be a strong positive signal to the market. As a result of the company’s improved balance sheet, we have increased our fair value estimate to C$25.07/sh (was C$23.50/sh) suggesting 104% upside potential.
North American Palladium released good drill results from Sunday Lake as part of the company’s regional exploration program. We continue to highlight that the imminent release of Q1/19 operating results should be an important catalyst for the company. We believe the company is undervalued relative to peers and with continued operating execution, along with a strong palladium market it should re-rate.
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.