Palladium One – a noble (metals) story to note

Summary and recommendation

Palladium One (TSXV:PDM) is an exploration story that has been largely overlooked by the market. With its main projects in Finland, and a secondary nickel/palladium area in Ontario, Canada, the share price has not kept up with the value metrics, and so represents, as of the end of August, 2020, an interesting play for junior natural resources investors.

Background

The primary area of operation for Palladium One is Finland. After decades of being essentially walled off to international miners, to the benefit of a few, large Finnish companies, the country has opened up, and miners have been finding many overlooked deposits. Recently, Rupert Resources (TSX-RVP) has emerged as a new major player at its Pahtavaara gold discovery, with a multi million ounce potential that has driven the share price to a 4X gain in the last 18 months, and its market cap to over $500 million.

Earlier, Agnico-Eagle’s Kittila gold mine, acquired in 2005, is now the largest gold mine in Europe.

Palladium One followed the model of both of these successes, by building on work done earlier, in their case largely by Finnish metals giant Outokumpo, and the survey work carried out by the Finnish government. They knew on Day One that their area had nickel, with a high platinum group metals component, and that metal that dominated was palladium. The question was only “how much and is it economic?”

Work Done To Date

The core project for Palladium One is the “Läntinen Koillsmaa” (LK) area in central Finland,  about 120 km north and east of the port of Oulu. It hold nine exploration permits, covering 2500 hectares, and a much larger reservation area, which we will get to later.

On the exploration permits, an initial indicated resource  at the Kaukua zone in 2019 was of about 636,000 ounces of palladium equivalent, which consists of palladium (~300,000 ounces), platinum (~100,000 ounces), gold, copper, and nickel. Inferred they have another 526,000 ounces of palladium equivalent, which consists of 224,000 ounces of palladium, and 70,000 ounces of platinum, plus the other metals. Significantly these ounces are defined in a Whittle modelled economic open pit that used an US$1,100 price assumption for palladium, whereas the current price is approximately US$2,200 per ounce.

Since reporting that initial resource, considerable and successful drilling has expanded the in-ground potential considerably. In 2019 there was only in a small corner of the permit area that had been drilled sufficient for a resource estimate.

In 2020 drilling at LK has yielded remarkably consistent results – 32 meters at 2.86 g/t on July 22, 41 meters at 2.16 g/t on July 28 and 116 meters of 1.16 g/t, including 63 meters of 1.88 g/t.

This work still touches only a small fraction of what IP signatures indicate could be a + 5 km strike length, with an abundance of drilling targets. Furthermore, this is not all of the permit area, there could be a mirror image section to the south of the current drilling targets.

It is not difficult to extrapolate from the current drilling that the 2019 resource could easily double in size, with more than a million ounces in measured and indicated, and at least that much again in the inferred category.  Only in the Kaukua area of the project, there is the potential for over three million ounces.

The good news is also that all of the current resource is relatively shallow. Drilling has been down to a maximum depth of ~300 meters, which means open pit, low capex development is possible for the early resources, and any underground potential would come later.

The company is well funded, with over $3 million in the bank at the moment.

What Else?

On its own, the nine exploration permits have the potential to support a mine. But in their Finnish portfolio Palladium One has a wild card.

It is very expensive to hold exploration permits in Finland – initially it costs €20 per hectare per year – this is so people do not “sit on” permits and do no work. But there is a system to “reserve” areas, to do non-invasive preliminary work, to decide if the developer wants to commit to an exploration permit.

Palladium One has “reserved” a large (20,000 hectare) area to the east of LK, called “Konstonjärvi” (KS) because it could be PGM elephant country.

This area appears to be the feeder zone for the metals rich LK area.  It covers a large part of the “Kollismaa Layered Igneous Complex” a huge structure that stretches into Russia to the east. For much of its route, the Kollismaa is very deep – 2- 3 kms – and so of little interest for mining.

But the shallow LK deposits appear to come from this source, so at some point, the deep dyke comes up to shallow depths.

Here things get theoretical: in these “hinge” areas, exceptionally high concentrations of heavy metals can accumulate. If one can locate that “hinge” area, the pay-off could be huge.

What Palladium One has the possibility of doing is finding that transition area from deep to shallow, in the 20,000 hectare area. But that will be expensive – holes that run more than a kilometer deep cost a lot. The company will not do that without some additional resources or a partner.

There is no way to estimate what this area represents, but if things worked out, it certainly has multi-million ounce potential.

Oh, Canada

For understandable reasons, the focus of Palladium One management is on the large potential in Finland. But the company has a prospective nickel-copper-PGM play near Marathon, Ontario which comes from the company history. The area is 55 km north of the million ounce Marathon deposit, in a similar setting. Former drilling campaigns yielded +1% nickel with ~0.5% copper grades over intervals.

The company is getting no value for this asset, so it is considering various options to spin off this property, which would give shareholders in Palladium One some amount of “free” shares in some new entity, of acquiring company.

Valuations

At present (26/8/2020) the Palladium One shares on the TSXV are selling at C$0.11, up from a low of C$0.045 a year ago. There are 126 million shares outstanding, so the basic market cap is C$13.8 million. Eric Sprott owns 21 million shares.

There are 76 million warrants outstanding, at between C$0.10-0.15 per share. Some 88% of these are at C$0.12.

The average volume is 360,000 shares per day, so for a small cap stock, it is liquid.

All told, the warrants would increase the shares outstanding to 202 million, but bring in around C$8 million of new cash. If the share price gets to C$0.20, it would be possible to force conversion of the warrants. With that sort of money, it may be that, the elephant hunting at the KS extension could begin.

There are easy, if very elastic, metrics for gold in the ground. The conventional view is that the value of an ounce of gold can vary from $50 for basic discovery to $150 per ounce for pre-production gold. With gold over $1900 an ounce, it may be that these metric could be revised upward.

There is less of a well established basis for valuing PGMs. Recently Paradigm Capital, in an analysis of the sector, suggested that US$30-70 per ounce would be an appropriate valuation for an ounce of PGMs in the ground. And that $50 (again, $50!) as an average could be used.

Using that metric, and applying it to Palladium One, based only on their 2019 indicated 636,000 ounces, the company should have been worth C$ 42 million a year ago. If you include the inferred resource, that would make the company worth C$0.61 a share.

But there is clearly a lot more than 1 million ounces of palladium equivalent at LK. An additional million ounces could make this a C$0.60 stock. Any drilling success beyond the current program would only increase the intrinsic value.

Shareholders would get a possible spin-out bonus, and there is the unknowable but fascinating potential of drilling success in the KS area.

The management has been building value through the drillbit. It seems likely that, well before the time comes to discuss production plans, the company will be acquired. However things develop, the current price level represents an opportunity for gains.

Michael Colligan

Partner, Private Equity

28.08.2020

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