Will a Strike Put a Damper on North American Palladium?

North American Palladium’s (AMEX:PAL,TSX:PDL) Lac des Iles mine is one of the only primary palladium mines in the world. The company recently announced that its mine expansion project is on schedule and that the results from its drilling program support ongoing development and mine planning. North American Palladium (PDL) seems to be moving toward its goal of having a long-life, low-cost palladium mine. Perhaps the only thing amiss is its failure to reach an agreement with union workers who are now threatening to strike.

After PDL restarted operations in 2010 following a period of care and maintenance, the company began expanding Lac des Iles.

This project, at which the company has reported significant progress, includes extending the ramp used for underground mining, raiseboring a shaft that will have a capacity of 7,000 tonnes per day (tpd), and utilizing a highly-mechanized bulk mining method.

The shaft is considered the critical aspect of the expansion. In the Q2 results release, William Biggars, president and CEO, said,“[w]e continue to see positive progress and are on target to begin commissioning the shaft by year end.”

By Q1 2013, the company expects production to increase to 3,500 tpd. Upon successful completion of the expansion in 2015, production rates should increase to 5,500 tpd, allowing PDL to achieve its goal of over 250,000 ounces a year at a cost of about $200 per ounce.

The company says it could become the world’s lowest cost palladium producer.

In addition to the positive expansion progress, management also expects that the company will meet this year’s guidance of 150,000 to 160,000 ounces of palladium at a cash cost of $375 to $400 per ounce. Through June 30, the company had produced 81,777 ounces at a cash cost of $404 per ounce.

The company’s confidence has been further boosted by positive results from its drilling program. PDL reported that measured resources nearly tripled, a significant amount of indicated resources were converted to the measured category, and inferred resources nearly doubled.

Investors’ confidence also appears to be on the upside. The company’s stock was up 7.69 percent on Wednesday afternoon in spite of the fact that PDL is in the midst of labor negotiations that have the potential to result in a strike.

In its 2011 annual report, PDL told investors that its collective agreement with the United Steelworkers (USW) union would expire on May 31, 2012. A new agreement and the terms that will be included are still up in the air.

Ninety-four percent of  the local USW chapter have voted in favor of a strike mandate. And the union has warned that it will take action if an agreement is not reached.

“There are significant issues unresolved regarding health and safety issues at the site as well as quality of life issues pertaining to the employer shift scheduling and monetary issues,” Herb Daniher, a USW staff representative, wrote to a local paper.

These claims of significant safety issues come on the heels of the announcement that the Ontario Mining Association selected Lac des Iles for a regional safety award for outstanding safety performance last year.

However, Daniher told the local press that underground mining is one of the most dangerous work environments. He said the site needs a full-time health and safety advisor, but the position has been vacant for over two years.

The scheduling grievances revolve in part around the company’s decision to extend work rotations. Lac des Iles operates two 12-hour shifts seven days per week, and employees generally live at the mine site during their work rotations, which PDL has stretched to 14 days.

Daniher describes this change as “not acceptable” and “not conducive to peoples’ lifestyle in Northwestern Ontario.”

PDL has already informed investors that the inability to renew the labor agreement on acceptable terms could have an adverse effect on the company and could potentially delay or prevent operations at Lac des Iles.

The company also said work stoppages could affect the company’s financial performance.

Those statements were apparently little more than FYI tidbits for investors, because PDL seems to be downplaying this situation.

“The strike mandate is standard course of business in such negotiations,” said Camilla Bartosiewicz, director of investor relations and corporate communications at PDL.

When asked if it is also standard procedure to allow labor agreements to lapse for several months before negotiating, Bartosiewicz said that she was not prepared to comment further at this stage about any issues pertaining to union action, as the company is in midst of negotiations.

She did, however, add that in 20 years of operation there has not been a strike at the mine.

“We have a good relationship with United Steelworkers and we expect to reach a resolution,” she said.

Daniher has made similar optimistic statements about the outcome and also describes the strike vote as “a necessary step in the bargaining process.”

However, Daniher has also made it clear that if an agreement is not reached during mediated meetings between September 4 to 6, the union will have no alternative to commencing strike action.

That strike would begin on September 10, according to the local press.

Securities Disclosure: I, Michelle Smith, do not hold equity interest in any companies mentioned in this article.