GMP Securities:

February 27, 2013

Updating Valuation for PFS & 2013 Guidance

With this report we have rebuilt our valuation model to reflect the longer-term impact of a switch to a lower cut-off of 2.5g/t in the Offset Zone Pre-Feasibility Study (PFS) as well as the 2013 guidance released last Friday.

On February 19th, PDL released a PFS for the Offset zone which upgraded the resources to an initial reserve 1.07mmoz of palladium at 4.3g/t plus an additional 1.99mmoz at 4.26g/t of M+I resources at a 2.5g/t cut-off. The previous Offset PEA and resources had all used a 3.5g/t cut-off and as such we had been modeling a 5g/t development of the Offset zone. Two significant upsides were not reflected in the PFS due to lack of infill drilling: 1) upgrading the rest of the resource to reserve; and 2) impact of an expansion to 5,500tpd.

$40-70mm Estimated Funding Shortfall Manageable

Last Thursday after the close (Feb 21), North American Palladium released full Q4 results (mostly pre-reported) as well as 2013 guidance for operations and more importantly capex required to complete Offset zone development. As of December 31st required capex and sustaining capital stood at $105mm for 2013 compared to financing resources of $20.2mm of cash and $27.5mm undrawn from its credit facility. While detailed quarterly guidance was not disclosed, our modeling suggests that the company will have to arrange an additional $40-75mm of financing sometime in late Q1 or early Q2. In our opinion, this should be a manageable amount to finance either through equity, debt or a hybrid structure.

Valuation

Following the release of the PFS and Q4 results, we have updated our model. We have decreased our modeled grades and increased our operating cost assumptions during the 3,500 initial phase of operations to be in line with the PFS. We made our own assumptions to model an expansion to 5,500tpd for a capex of $50mm and delivering a 14% unit cost savings.

There is no impact to the target of $2.00 and BUY rating. We did increase our target setting multiple to 1.0x from 0.9x to reflect the reduced financing risk of an implied modest financing requirement of $40-75mm. In our opinion, arranging financing requirements and completing Offset zone development will justify further incremental increases in target setting P/NAV multiples. Our valuation also shows significant leverage to palladium prices – we are currently modeling $700/oz long term. Even a modest increase to $750/oz (currently $739/oz spot price) implies a 25% increase to our valuation.

We remain bullish of the PGM sector and continue to see good re-rating potential and leverage to the palladium price for PDL.