6-K

SECURITIES AND EXCHANGE COMMISSION

Form 6-K

Report of Foreign Issuer

Pursuant to Rule 13a-16 or 15d-16 of

The Securities Exchange Act of 1934

For the month of February, 2015 Commission File Number: 1-15142

NORTH AMERICAN PALLADIUM LTD.

(Name of Registrant)

200 Bay Street

Royal Bank Plaza, South Tower

Suite 2350

Toronto, Ontario

Canada M5J 2J2

(Address of Principal Executive Offices)

Indicate by checkmark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:

Form 20-F  ¨            Form 40-F  x

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):  ¨

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):  ¨

Indicate by checkmark whether the registrant, by furnishing the information contained in this Form is also thereby furnishing the information to the SEC pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:

Yes  ¨ Assigned File No.                      No  x

If “Yes” is marked, indicate the file number assigned to the Registrant in connection with Rule 12g3-2(b).

This report on Form 6-K is specifically incorporated by reference into North American Palladium’s registration statement on Form S-8 (File No. 333-13766) and registration statement on Form F-10 (File No. 333-200762).

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		NORTH AMERICAN PALLADIUM LTD.
Date:	February 19, 2015	By:	/s/ Tess Lofsky
			Tess Lofsky
			Vice President, General Counsel & Corporate Secretary

EXHIBIT INDEX

Exhibit	Description of Exhibit
1	2014 Q4 Management’s Discussion and Analysis
2	2014 Q4 Financial Statements

EX-1

Exhibit 1

North American Palladium Ltd.

TABLE OF CONTENTS

	Page
Management’s Discussion and Analysis
INTRODUCTION		1
FORWARD-LOOKING INFORMATION		1
CAUTIONARY NOTE TO U.S. INVESTORS CONCERNING MINERAL RESERVES AND RESOURCES		2
OUR BUSINESS		2
HIGHLIGHTS		3
SELECTED ANNUAL INFORMATION		4
LDI OPERATING & FINANCIAL RESULTS		5
GOLD OPERATIONS		12
FINANCIAL CONDITION, CASH FLOWS, LIQUIDITY AND CAPITAL RESOURCES		13
FINANCIAL CONDITION		14
OUTSTANDING SHARE DATA		16
CRITICAL ACCOUNTING POLICIES AND ESTIMATES		17
RISKS AND UNCERTAINTIES		21
INTERNAL CONTROLS		21
OTHER INFORMATION		21
NON-IFRS MEASURES		22

North American Palladium Ltd.

Management’s Discussion and Analysis

INTRODUCTION

Unless the context suggests otherwise, references to “NAP” or the “Company” or similar terms refer to North American Palladium Ltd. and its subsidiaries. “LDI” refers to Lac des Iles Mines Ltd. and “NAP Quebec” refers to its previously held subsidiary, NAP Quebec Mines Ltd.

The following is management’s discussion and analysis of the financial condition and results of operations (“MD&A”) to enable readers of the Company’s consolidated financial statements and related notes to assess material changes in financial condition and results of operations for the year ended December 31, 2014, compared to those of the respective periods in the prior year. This MD&A has been prepared as of February 18, 2015 and is intended to supplement and complement the consolidated financial statements and notes thereto for the year ended December 31, 2014 (collectively, the “Financial Statements”), which have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the IASB. Readers are encouraged to review the Financial Statements in conjunction with their review of this MD&A and the most recent Form 40-F/Annual Information Form on file with the U.S. Securities and Exchange Commission (“SEC”) and Canadian provincial securities regulatory authorities, available at www.sec.gov and www.sedar.com, respectively.

Mr. James Gallagher, the Company’s Chief Operating Officer and a Qualified Person under National Instrument 43-101, has reviewed and approved all technical items disclosed in this MD&A.

All amounts are in Canadian dollars unless otherwise noted and all references to production ounces refer to payable production.

FORWARD-LOOKING INFORMATION

Certain information contained in this MD&A constitutes ‘forward-looking statements’ within the meaning of the ‘safe harbor’ provisions of the United States Private Securities Litigation Reform Act of 1995 and Canadian securities laws. All statements other than statements of historical fact are forward-looking statements. The words ‘expect’, ‘believe’, ‘anticipate’, ‘contemplate’, ‘target’, ‘may’, ‘will’, ‘could’, ‘intend’, ‘estimate’ and similar expressions identify forward-looking statements. Forward-looking statements included in this MD&A include, without limitation: information as to our strategy, plans or future financial or operating performance, project timelines, production plans, projected cash flows or expenditures, operating cost estimates, mining methods, expected mining rates and other statements that express management’s expectations or estimates of future performance. The Company cautions the reader that such forward-looking statements involve known and unknown risk factors that may cause the actual results to be materially different from those expressed or implied by the forward-looking statements. Such risk factors include, but are not limited to: that the Company may not be able to generate sufficient cash to service all its indebtedness and may be forced to take other actions to satisfy its obligations, hedging could expose it to losses, competition, the possibility title to its mineral properties will be challenged, dependency on third parties for smelting and refining, the possibility that metal prices and foreign exchange rates may fluctuate, inherent risks associated with development, exploration, mining and processing including risks related to tailings capacity and ground conditions, environmental hazards, uncertainty of mineral reserves and resources, the possibility that the mine may not perform as planned, changes in legislation, regulations or political and economic developments in Canada and abroad, employment disruptions including in connection with collective agreements between the Company and unions, litigation and the risks associated with obtaining necessary licenses and permits. For more details on these and other risk factors see the Company’s most recent Annual Information Form on file with the SEC and Canadian provincial securities regulatory authorities. Forward-looking statements are necessarily based upon a number of factors and assumptions that, while considered reasonable by management, are inherently subject to significant business, economic and competitive uncertainties and contingencies. The factors and assumptions contained in this MD&A, which may prove to be incorrect, include, but are not limited to: that the Company will continue in

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North American Palladium Ltd.

operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of business, that metal prices and exchange rates between the Canadian and United States dollar will be consistent with the Company’s expectations, that there will be no material delays affecting operations or the timing of ongoing projects, that prices for key mining and construction supplies, including labour costs, will remain consistent with the Company’s expectations, and that the Company’s current estimates of mineral reserves and resources are accurate. The forward-looking statements are not guarantees of future performance. The Company disclaims any obligation to update or revise any forward-looking statements, whether as a result of new information, events or otherwise, except as expressly required by law. Readers are cautioned not to put undue reliance on these forward-looking statements.

CAUTIONARY NOTE TO U.S. INVESTORS CONCERNING MINERAL RESERVES AND RESOURCES

Mineral reserve and mineral resource information contained herein has been calculated in accordance with National Instrument 43-101 – Standards of Disclosure for Mineral Projects, as required by Canadian provincial securities regulatory authorities. Canadian standards differ significantly from the requirements of the SEC, and mineral reserve and mineral resource information contained herein is not comparable to similar information disclosed in accordance with the requirements of the SEC. While the terms “measured”, “indicated” and “inferred” mineral resources are required pursuant to National Instrument 43-101, the SEC does not recognize such terms. U.S. investors should understand that “inferred” mineral resources have a great amount of uncertainty as to their existence and great uncertainty as to their economic and legal feasibility. In addition, U.S. investors are cautioned not to assume that any part or all of NAP’s mineral resources constitute or will be converted into reserves. For a more detailed description of the key assumptions, parameters and methods used in calculating NAP’s mineral reserves and mineral resources, see NAP’s most recent Annual Information Form/Form 40-F on file with Canadian provincial securities regulatory authorities and the SEC.

OUR BUSINESS

NAP is an established precious metals producer that has been operating its LDI Mine located in Ontario, Canada since 1993. LDI is one of only two primary producers of palladium in the world, offering investors exposure to the price of palladium.

The Company recently expanded the underground LDI Mine and has transitioned from ramp access to shaft access while utilizing long hole open stope mining. The Company has significant exploration potential near the LDI Mine, where a number of growth targets have been identified, and is engaged in an exploration program aimed at increasing its palladium reserves and resources. As an established palladium-platinum group metal (“PGM”) producer on a permitted property, NAP has the potential to convert exploration success into production and cash flow on an accelerated timeline.

The Company conducted an exploration program in 2014 that primarily targeted the lower portion of the Offset zone. A preliminary economic assessment is currently being completed to evaluate the economic potential of extending the mine life through an open pit expansion and/or an underground mine expansion that would increase production and would entail deepening the shaft and installing a lower level bulk ore handling system.

NAP trades on the TSX under the symbol PDL and on the NYSE MKT under the symbol PAL.

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HIGHLIGHTS

OPERATIONAL HIGHLIGHTS	2014		2013
Mining
Tonnes ore mined and processed		2,637,023		2,093,669
Palladium head grade (g/t)		2.6		2.7
Milling
Tonnes ore milled		2,684,782		2,048,082
Palladium head grade (g/t)		2.7		2.8
Palladium recovery (%)		82.4		80.7
Palladium production – payable ounces		174,194		135,158
Palladium sales – payable ounces		173,887		134,955
Realized palladium price per ounce (US$)	$	802	$	724
Cash cost per ounce palladium sold (US$) 1	$	513	$	560
FINANCIAL HIGHLIGHTS
($millions except per share amounts)	2014		2013
Revenue	$	220.1	$	153.2
Production costs		130.7		107.5
Income (loss) from mining operations		21.9		(0.8	)
Loss from continuing operations		66.7		48.7
Loss from continuing operations per share	$	0.20	$	0.26
Loss and comprehensive loss		66.7		46.2
Loss per share	$	0.20	$	0.25
EBITDA 1		23.4		(3.8	)
Adjusted EBITDA 1		50.0		15.3
Capital spending		23.8		109.5

¹  Non-IFRS measure. Please refer to Non-IFRS Measures on pages 22-24.

In 2014, the Company successfully transitioned from ramp to shaft based underground mining and the sources of ore milled have changed significantly.

• 2,637,023 tonnes were mined from the Offset and Roby zones and processed from the low grade surface stockpile at an average grade of 2.6 grams per tonne palladium.

• The mill processed 2,684,782 tonnes of ore at an average palladium head grade of 2.7 grams per tonne and a recovery of 82.4%.

• Payable palladium production was 174,194 ounces while payable palladium sales were 173,887 ounces.

• Cash interest of $41.4 million was paid including an amount that allowed the Company to revert to a 15% interest rate on its senior secured term loan.

• Revenue increased by $66.9 million compared to 2013 primarily due to increased palladium production and sales ($29.1 million), higher palladium prices ($12.9 million) and more favourable exchange rates ($13.1 million).

• Production costs increased $23.2 million to $130.7 million compared to 2013 primarily due to mining 50% more underground tonnes, milling 31% more tonnes and unfavourable inventory and other cost movements.

• Adjusted EBITDA increased $34.7 million to $50.0 million or 227% compared to 2013.

• During 2014, the Company had $49.6 million of interest expense and other costs, $18.3 million of foreign exchange losses and $7.5 million of financing costs.

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2013 was a transition year for the Company as it was sinking the shaft and completing related infrastructure while developing and transitioning to mining the Offset zone. As a result, the 2013 financial results would not be directly comparable to the prior or future years. In 2013:

• 2,093,669 tonnes were mined at an average grade of 2.7 g/t palladium.

• The mill processed 2,048,082 tonnes of ore at an average palladium head grade of 2.8 grams per tonne and a recovery of 80.7% to produce 135,158 ounces of payable palladium.

• Revenue decreased to $153.2 million in 2013 primarily due to lower tonnes and grades of ore milled partially offset by higher realized palladium prices.

• Production costs increased to $107.5 million in 2013 primarily due to unfavourable movements in inventory levels and increased power consumption partially offset by insurance proceeds received in 2013.

• Capital expenditures totaled $109.5 million with $91.8 million spent of the LDI mine expansion, and an additional $20.5 million spent primarily on the tailings management facility.

• The Company had an $11.0 million loss on extinguishment of long-term debt and a $7.4 million foreign exchange loss primarily on US$ denominated debt.

SELECTED ANNUAL INFORMATION

Statement of Operations and Statement of Cash Flow Data

($millions except for share and per share amounts)	2014			2013
Gross sales revenue	$	220.1		$	153.2
Smelting, refining and freight costs		19.0			14.0
Royalty expense		9.1			6.5
Net revenue		192.0			132.7
Production costs		130.7			107.5
Depreciation and amortization		37.7			25.5
Others, net		1.7			0.5
Income (loss) from mining operations		21.9			(0.8	)
Loss and comprehensive loss		66.7			46.2
Basic loss per share	$	0.20		$	0.25
Diluted loss per share	$	0.20		$	0.26
Net cash provided by (used in) operating activities		(11.5	)		6.5
Net cash provided by financing activities		29.4			71.3
Capital expenditures		23.8			109.5
Basic weighted-average number of Common Shares outstanding (millions)		339.3			187.2
Number of Common Shares outstanding (millions)		386.5			197.1

For the year ended December 31, 2014, revenue increased 44% to $220.1 million compared to $153.2 million in the prior year. Income from mining operations for the year ended December 31, 2014 was $21.9 million compared to a loss from mining operations of $0.8 million in the prior year.

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LDI OPERATING & FINANCIAL RESULTS

The LDI mine consists of an underground mine, an open pit (currently inactive), a substantial low grade surface stockpile, a mill and a shaft with processing capacities of approximately 15,000 and 8,000 tonnes per day respectively. The primary underground deposits on the property are the Offset and Roby zones. During 2014, mill throughput was impacted by running the mill full time on a test basis throughout the fourth quarter compared to a batch basis for the first three quarters. Underground production was impacted by ongoing transitioning to shaft-based mining, upgrades to the ore handling system, repairs to the primary surface crusher, oversized muck, equipment availability and a fatality.

Operating Results

The key operating results for the palladium operations are set out in the following table.

	2014		2013
Ore mined (tonnes)
Underground
Offset		1,060,706		673,668
Roby		164,841		143,037
		1,225,547		816,705
Surface
Low grade stockpile & reprocessed tailings		1,411,476		738,641
Open pit		—		538,323
		1,411,476		1,276,964
Total		2,637,023		2,093,669
Mined ore grade (Pd g/t)
Underground
Offset		4.4		4.5
Roby		4.4		4.2
		4.4		4.4
Surface
Low grade stockpile & reprocessed tailings		1.1		1.1
Open pit		—		2.3
High grade stockpile		—		—
		1.1		1.6
Average		2.6		2.7
Milling
Tonnes of ore milled		2,684,782		2,048,082
Palladium head grade (g/t)		2.7		2.8
Palladium recoveries (%)		82.4		80.7
Tonnes of concentrate produced		21,519		16,966
Production cost per tonne milled	$	49	$	52
Payable production
Palladium (oz)		174,194		135,158
Platinum (oz)		13,072		10,222
Gold (oz)		11,607		10,423
Nickel (lbs)		1,677,820		1,437,311
Copper (lbs)		3,029,525		2,828,271
Cash cost per ounce of palladium sold (US$)1	$	513	$	560

¹  Non-IFRS measure. Please refer to Non-IFRS Measures on pages 22-24.

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Mining

In 2014, underground tonnes mined from the Offset and Roby zones were blended with the low grade surface stockpile material for processing in the mill. Underground ore mined at LDI from the Offset and Roby zones consisted of 1,225,547 tonnes at an average grade of 4.4 g/t palladium compared to 816,705 tonnes at an average palladium grade of 4.4 g/t in the prior year. LDI processed 1,411,476 tonnes of the low grade surface stockpile and tailings at an average grade of 1.1 g/t palladium in 2014 compared to 1,276,964 tonnes at an average palladium grade of 1.6 g/t processed from the open pit and low grade stockpiles in the prior year. On a combined basis, 26% more tonnes of ore were mined and processed in 2014 at similar grades as in 2013.

During 2013, the open pit and Roby zone were largely mined out in May and March respectively. Ore mined at LDI during the year ended December 31, 2013, consisted of 2,093,669 tonnes at an average grade of 2.7 g/t palladium with the average grade of ore mined in 2013 decreasing primarily due to the mix of tonnage and grades from the various ore sources.

Milling

During 2014, the LDI mill processed 2,684,782 tonnes of ore at an average palladium head grade of 2.7 g/t and a recovery of 82.4% to produce 174,194 ounces of payable palladium (2013 – 2,048,082 tonnes milled, average palladium head grade of 2.8 g/t, recovery of 80.7%, producing 135,158 ounces of payable palladium). The higher mill recovery in 2014 compared to 2013 was primarily due to improvements in the mill circuit late in 2013 which increased the percentage of palladium recovered while processing similar ore grades.

Production Costs per Tonne Milled

Production costs per tonne milled in 2014 were $49 compared to $52 per tonne in 2013. The changes were primarily due to higher costs associated with mining greater quantities of underground ore (which costs more per tonne to mine) in 2014 compared with 2013 as well as the cost changes noted in the production cost section below partially offset by the impact of greater tonnes milled in 2014.

Payable Production

Payable production in 2014 was higher for all payable metals compared to 2013 primarily due to greater tonnes milled and higher recoveries for all metals, except nickel, being offset by lower mill head grades for all payable metals.

Cash Cost per Ounce of Palladium Sold

Cash cost per ounce of palladium sold is a non-IFRS measure and the calculation is provided in the Non-IFRS Measures section of this MD&A. In 2013, the Company was in transition, sinking a shaft and completing related infrastructure at the same time it was developing and transitioning to mining the Offset zone. In 2014, the development and transitioning to the Offset zone was completed. The source of ore fed to the mill in 2013 and 2014 were from different ore sources some of which are more costly to mine.

The cash cost per ounce of palladium sold decreased to US$513¹ in 2014 compared to US$560 ¹ in 2013. The decrease in cash cost in 2014 was mostly due to more payable palladium ounces sold, favourable movements of the Canadian dollar and higher by-product revenues that were offset by increased production, smelting, refining, freight and royalty costs. Please refer to the LDI revenue, production costs, smelting, refining and freight costs and royalty expense sections of this MD&A for additional details.

¹ Non-IFRS measure. Please refer to Non-IFRS Measures on pages 22-24.

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Financial Results

Income from mining operations for the LDI operations is summarized in the following table.

($millions)	2014		2013
Gross revenue	$	220.1	$	153.2
Smelting, refining and freight costs		19.0		14.0
Royalty expense		9.1		6.5
Net revenue		192.0		132.7
Mining operating expenses
Production costs
Mining		76.1		64.9
Milling		33.2		26.6
General and administration		20.5		16.6
		129.8		108.1
Inventory		0.9		(0.6	)
		130.7		107.5
Depreciation and amortization		37.7		25.5
Others		—		(1.3	)
Inventory pricing adjustment		—		0.7
Loss on disposal of equipment		1.7		1.1
Total mining operating expenses		170.1		133.5
Income (loss) from mining operations	$	21.9	$	(0.8	)

The Company has included income from mining operations as an additional IFRS measure to provide the user with additional information on the actual results of the LDI operations.

Gross Revenue

Gross revenue is affected by production and sales volumes, commodity prices, currency exchange rates, mill run timing and shipment schedules. Metal sales for LDI are recognized in revenue at provisional prices when delivered to a smelter for treatment or a designated shipping point. Final pricing is determined in accordance with LDI’s smelter agreements. In most cases, final pricing is determined two months after delivery to the smelter for gold, nickel and copper and four months after delivery for palladium and platinum. Final pricing adjustments can result in additional revenues in a rising commodity price environment and reductions to revenue in a declining commodity price environment. Similarly, a weakening in the Canadian dollar relative to the U.S. dollar would have a positive impact on revenues and a strengthening in the Canadian dollar would have a negative impact on revenues. The Company periodically enters into financial contracts for past production delivered to the smelters to mitigate the smelter agreements’ provisional pricing exposure to rising or declining palladium prices and an appreciating Canadian dollar. These financial contracts represent 12,800 ounces of palladium as at December 31, 2014 (December 31, 2013 – 31,000 palladium ounces) and mature In February 2015 at an average forward price of US$812 per ounce of palladium (December 31, 2013 – US$735). For substantially all of the palladium delivered to the customers under the smelter agreements, the quantities and timing of settlement specified in the financial contracts match final pricing settlement periods. The palladium financial contracts are being recognized on a mark-to-market basis as an adjustment to revenue. The fair value of these contracts at December 31, 2014 was an asset of $0.2 million included in accounts receivable compared to $0.2 million at December 31, 2013.

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Revenue for the year ended December 31, 2014
	Palladium		Platinum			Gold		Nickel		Copper			Others		Total
Sales volume(1)		173,887		12,987			11,605		1,644,807		3,019,105			n.a.		n.a.
Realized price (US$) (1)	$	802	$	1,384		$	1,270	$	7.53	$	3.11			n.a.		n.a.
Revenue before price adjustment	$	155.8	$	19.6		$	16.1	$	13.8	$	10.3		$	0.1	$	215.7
Price adjustment ($millions):
Commodities		2.2		(0.5	)		0.2		0.2		(0.3	)		—		1.8
Foreign exchange		1.4		0.5			0.3		0.2		0.2			—		2.6
Revenue ($million)	$	159.4	$	19.6		$	16.6	$	14.2	$	10.2		$	0.1	$	220.1

⁽¹⁾  Quantities and prices are per ounce for palladium, platinum and gold and per pound for nickel and copper.

Revenue for the year ended December 31, 2013
	Palladium		Platinum			Gold			Nickel			Copper		Others		Total
Sales volume(1)		134,955		10,192			10,416			1,437,311			2,812,214		n.a.		n.a.
Realized price (US$) (1)	$	724	$	1,499		$	1,437		$	6.71		$	3.32		n.a.		n.a.
Revenue before price adjustment	$	101.5	$	15.7		$	15.2		$	10.1		$	9.6	$	0.2	$	152.3
Price adjustment ($millions):
Commodities		1.5		(0.4	)		(0.8	)		(0.3	)		—		—		—
Foreign exchange		—		0.4			0.3			0.1			0.1		—		0.9
Revenue ($millions)	$	103.0	$	15.7		$	14.7		$	9.9		$	9.7	$	0.2	$	153.2

⁽¹⁾  Quantities and prices are per ounce for palladium, platinum and gold and per pound for nickel and copper.

During 2013, the Company was sinking the shaft and completing related infrastructure while developing and transitioning to mining the Offset zone. Palladium sales for the year ended 2013 were impacted by a new smelter contract which included lower accountability rates for the payable metal contained in concentrate compared to the contract that was in effect in the prior period. The change in operating activities, sources of ore processed and smelting agreement make comparisons between periods difficult.

Revenue for 2014 increased by $66.9 million or 44% compared to 2013 primarily due to 29% more ounces of palladium sold at 11% higher realized prices, a 6% favourable movement in the exchange rate and greater volumes of platinum (+27%), gold (+11%), nickel (+14%) and copper (+7%) sold.

Spot Metal Prices* and Exchange Rates

For comparison purposes, the following table sets out spot metal prices and exchange rates.

	Dec-31		Sep-30		Jun-30		Mar-31		Dec-31		Sep-30		Jun-30		Mar-31
	2014		2014		2014		2014		2013		2013		2013		2013
Palladium – US$/oz	$	798	$	775	$	844	$	778	$	711	$	726	$	643	$	770
Platinum – US$/oz	$	1,210	$	1,300	$	1,480	$	1,418	$	1,358	$	1,411	$	1,317	$	1,576
Gold – US$/oz	$	1,199	$	1,217	$	1,315	$	1,292	$	1,202	$	1,327	$	1,192	$	1,598
Nickel – US$/lb	$	6.77	$	7.49	$	8.49	$	7.14	$	6.34	$	6.29	$	6.20	$	7.50
Copper – US$/lb	$	2.85	$	3.03	$	3.15	$	3.01	$	3.34	$	3.31	$	3.06	$	3.44
Exchange rate (Bank of Canada) – CDN$1 = US$	US$	0.86	US$	0.89	US$	0.94	US$	0.90	US$	0.94	US$	0.97	US$	0.95	US$	0.98

* Based on the London Metal Exchange

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North American Palladium Ltd.

Smelting, refining and freight costs

Smelting, refining and freight costs in 2014 were $19.0 million compared to $14.0 million in 2013. The increase in 2014 primarily due to the impact of a weaker Canadian dollar and more tonnes of concentrate shipped.

Royalty expense

For 2014, royalty expense was $9.1 million compared to $6.5 million in 2013. The increase in 2014 was primarily due to higher revenues in 2014 compared to 2013.

Mining Operating Expenses

Throughout the fourth quarter of 2014, the Company performed a fulltime trial mill run that fully utilized the mill compared to the batch basis of operations (i.e. 14 to 16 days a month) in 2013 and the first nine months of 2014. The full mill run was possible due to improvements in the rate of underground mining which, combined with available surface low grade ore stockpiles and a buildup of inventory of underground ore on surface at September 30, 2014, allowed the higher mill production. Unit operating costs in the fourth quarter of 2014 were favourably impacted by the increased mill tonnage.

In 2014, the Company completed modifications to the design of the underground ore handling system, made repairs to the primary surface crusher, endured a colder than normal winter and experienced a fatality, all of which negatively impacted production, payable metal sales and cash cost. 2013 was a transition year for the Company as the shaft sinking and related infrastructure was being completed at the same time the Company was developing and transitioning to mining the Offset zone.

Production costs

For 2014, production costs were $130.7 million compared to $107.5 million in 2013.

Mining costs for 2014 increased $11.2 million (17%) to $76.1 million compared to $64.9 million in 2013. In 2014, the Company was predominantly mining underground in the Offset zone, transporting that material up the shaft and the ramp while blending underground material with lower grade surface material. In 2013, mining was predominantly in the Offset and Roby zones (that was transported to surface using the ramp) and from the open pit and surface stockpiles. As it is more costly to mine underground material compared to surface material, mining costs would be expected to increase as a greater proportion of underground material is mined. As such, the 2014 and 2013 production costs are not comparable.

Milling costs increased by $6.6 million (25%) to $33.2 million in 2014 compared to $26.6 million in 2013. The increase in 2014 compared to 2013 was primarily due to: more tonnes milled; increased depressant usage and grinding media, liner change-outs and higher power costs.

General and administration costs in 2014 increased $3.9 million (23%) to $20.5 million compared to $16.6 million in 2013. The 2014 increase was primarily due to amounts charged to the Offset zone capital costs in 2013 that did not recur in 2014 with the completion of the project; increased consultant costs; and, in the first quarter of 2014, increased propane costs due to a colder than normal winter.

Inventory cost was $0.9 million in 2014 and a reduction of $0.6 million in 2013. The change in inventory costs over the periods was due to inventory movements.

Depreciation and amortization

Depreciation and amortization for 2014 was $37.7 million compared to $25.5 million in 2013. The 2014 increase was primarily due to increased production and a significant increase in depreciable assets associated with the LDI mine expansion including the Offset zone and tailings management facilities compared to 2013.

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North American Palladium Ltd.

OTHER EXPENSES

Exploration

Exploration expenditures for 2014 were $8.3 million compared to $12.3 million in 2013. The decrease was primarily due to a more limited exploration program in 2014 compared with 2013. The 2014 exploration program was focused on:

(i) drilling the lower part of the Offset zone below the 1,065 meter level - the known limit of proven and probable reserves;

(ii) resource conversion drilling in the upper Offset zone directly north of active and planned mining stopes;

(iii) delineation of new resources in the upper Offset southeast extension, the shallowest known level of the deposit; and,

(iv) Surface exploration targets including the Powerline zone.

In 2014, 36,495 metres of exploration drilling was completed.

Of the $12.3 million expensed in 2013, $6.8 million was spent on the Upper Offset Southeast, North VT Rim, Sheriff, Roby Northeast, South VT Rim and, and South LDI near mine targets and $1.9 million was spent on greenfields targets. In 2013, 45,162 metres of exploration drilling was completed.

Corporate general and administration

The Company’s corporate general and administration expenses for 2014 were $9.6 million compared to $10.8 million in 2013. The 2014 decrease was primarily due to less costs relating to legal, consultants, recruiting activities and director fees.

Loss on extinguishment of debt

In 2013, in connection with a financing, the Company repaid existing senior secured notes and incurred an $11.0 million loss including a $7.2 million debt repayment premium.

Interest and other income

Interest and other income for 2014 was $4.7 million compared to $2.0 million in 2013. The increase in 2014 was primarily due to changes in the fair value of convertible debenture warrants in 2014 partially offset by gains on palladium warrants and the renunciation of flow-through expenditures in 2013 that did not recur in 2014.

Interest expense and other costs

Prior to the commencement of commercial production from the shaft on January 1, 2014, the Company had capitalized interest expenses related to the senior secured term loan and the revolving operating line of credit. In 2014, interest related to these loans was expensed.

Interest expense and other costs in 2014 were $49.6 million compared to $6.9 million in 2013. The 2014 increase of $42.7 million was primarily due to a $37.3 million increase due to the commencement of commercial production as noted above and $6.2 million of changes in the fair value of the convertible debentures issued in 2014.

Financing costs

Financing costs for 2014 were $7.5 million compared to $3.7 million in 2013. The 2014 increase was primarily due to financing costs related to the 2014 convertible debentures issued partially offset by 2013 financing costs related to outlays incurred for the initial investigation and negotiation of various potential financing alternatives prior to entering into the final amending agreement for the senior secured term loan in the fourth quarter of 2013.

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North American Palladium Ltd.

Foreign exchange loss

Foreign exchange loss for 2014 was $18.3 million compared to $7.4 million in 2013. The 2014 and 2013 losses were primarily due to the impact of exchange rate movements on the US$ denominated senior secured term loan and the US$ denominated credit facility. Non-cash components of the losses in 2014 and 2013 were $15.7 million and $7.0 million respectively.

Income and mining tax recovery

The income and mining tax recovery for 2013 was $2.2 million compared to $nil in 2014. The 2013 recovery relates to the recognition of Ontario resource tax credits.

Summary of Quarterly Results

($millions except per share amounts)	2014												2013
	Q4			Q3			Q2			Q1			Q4			Q3			Q2			Q1
Revenue	$	74.5		$	46.4		$	50.5		$	48.7		$	39.6		$	33.3		$	33.2		$	47.1
Production costs, net of mine restoration costs		40.5			30.1			30.4			29.7			29.9			22.9			25.4			29.3
Exploration expense		3.1			2.5			1.9			0.8			1.4			3.9			2.2			4.8
Capital expenditures		9.5			5.8			5.6			2.9			16.7			26.9			27.8			38.1
Net income (loss) from continuing operations		(11.3	)		(18.8	)		(9.9	)		(26.7	)		(11.7	)		(5.3	)		(26.3	)		(5.4	)
Net income (loss)		(11.3	)		(18.8	)		(9.9	)		(26.7	)		(11.7	)		(5.3	)		(26.3	)		(2.8	)
Cash provided by (used in) operations		1.0			8.0			(3.8	)		(16.7	)		4.2			2.0			(2.8	)		3.1
Cash provided by (used in) financing activities		0.7			(34.7	)		31.6			31.8			4.3			(2.1	)		52.0			17.1
Cash provided by (used in) investing activities		(9.5	)		(5.8	)		(5.4	)		(2.9	)		(16.7	)		(26.7	)		(27.8	)		(37.1	)
Net income (loss) per share from continuing operations
– basic	$	(0.01	)	$	(0.05	)	$	(0.03	)	$	(0.11	)	$	(0.05	)	$	(0.03	)	$	(0.15	)	$	(0.03	)
– diluted	$	(0.01	)	$	(0.05	)	$	(0.03	)	$	(0.11	)	$	(0.05	)	$	(0.03	)	$	(0.16	)	$	(0.03	)
Net income per share
– basic	$	(0.01	)	$	(0.05	)	$	(0.03	)	$	(0.11	)	$	(0.05	)	$	(0.03	)	$	(0.15	)	$	(0.02	)
– diluted	$	(0.01	)	$	(0.05	)	$	(0.03	)	$	(0.11	)	$	(0.05	)	$	(0.03	)	$	(0.16	)	$	(0.02	)
Tonnes milled		1,080,299			566,494			521,478			516,511			544,074			517,157			483,266			503,585
Palladium sold (ounces)		57,256			36,430			40,716			39,485			35,205			27,370			32,620			39,760
Realized palladium price (US$/ounce)		787			860			806			739			725			721			719			730

Fourth Quarter 2014:

• Revenue for the fourth quarter of 2014 increased by $34.9 million or 88% compared with the same period in 2013 primarily due to the impact of a trial full time mill run resulting in significantly higher precious metal quantities sold and more favourable palladium realized prices and foreign exchange rates partially offset by lower prices realized for platinum, gold and copper.

• Payable palladium, platinum, gold, copper and nickel, sold increased by 63%, 71%, 41% 26% and 63% respectively in the fourth quarter of 2014 compared with the same period in 2013.

• For the quarter ended December 31, 2014, production costs were $40.5 million compared to $29.8 million in the prior year period, a 36% increase. The $10.7 million increase in production costs was primarily due to a 78% increase in tonnes mined and a 99% increase in tonnes milled.

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• Cash provided by operations prior to changes in non-cash working capital for the quarter ended December 31, 2014, was a source of cash of $18.5 million, compared to $4.5 million in the prior year period. The increase of $14.0 million is primarily due to higher operating profits.

• For the quarter ended December 31, 2014, cash provided by operations was a source of cash of $1.0 million, compared to $4.2 million in the comparable 2013 period. The decrease of $3.2 million is primarily due to the change in cash provided by operations prior to changes in non-cash working capital discussed above, increases in accounts receivable of $23.9 million and inventories of $4.1 million partially offset by decreases of accounts payable and accrued liabilities of $10.3 million and greater depreciation of $6.0 million.

• During the fourth quarter of 2014, financing activities resulted in a source of cash of $0.7 million consisting of a $10.3 million increased utilization the credit facility primarily offset by $7.6 million of interest payments and $1.1 million of palladium warrant settlements.

• For the quarter ended December 31, 2014, investing activities used cash of $9.5 million (2013 - $16.7 million) due to additions to mining interests.

Trends:

• Revenue, production costs, tonnes milled and palladium ounces sold, varied over the last eight quarters as mining has transitioned from the Roby zone underground and the surface open pit to the Offset zone underground and surface stockpiles. Changes in tonnes, grades and sources of ore significantly impacted revenue realized, production costs, ore available for milling and palladium ounces produced.

• Readily available material in the Roby and open pit zones were largely mined out in the first half of 2013 while the Offset zone production has been ramping up since 2012.

• Realized quarterly average prices for palladium have ranged from US$719 to US$860 per ounce in the last eight quarters while prices for platinum, gold, copper and nickel have generally been flat to declining over the same period. The weakening of the Canadian dollar versus the United States dollar generally results in higher revenues.

• Underground mining operations have been transitioning to a shaft based ore handling system from a ramp based one in the most recent quarters. The Company is currently moving a majority of ore to surface using the shaft.

• Capital expenditures have been generally declining for the last eight quarters as activities associated with the construction of the shaft and related infrastructure to process the upper Offset zone ore were completed.

• Cash used in operations in Q1 2013 increased primarily due accounts payable payments.

• Cash from financing activities in Q1 and Q2 2014 was a primarily due to the issuance of convertible debentures while the use of funds in Q3 2014 was primarily due to a partial repayment of the senior security debt facility. Cash provided by financing activities in Q2 2013 was high primarily due to $131.9 million of senior secured term loan issued and $9.6 million share issuance less $79.2 million repayment of senior secured notes and $8.8 million repayment of the credit facility.

GOLD OPERATIONS

On March 22, 2013, the Company sold NAP Quebec for gross proceeds of $18.0 million in cash, 1.5 million common shares of Maudore Minerals Ltd. and $1.8 million of receivable inventory amounts. For Financial Statement purposes, NAP Quebec has been treated as a discontinued operation in 2013. For the year ended December 31, 2013, the Company has recorded $2.5 million income from discontinued operations, including a gain on disposal of discontinued operations of $1.5 million compared to a loss from discontinued operations of $54.6 million in the prior year.

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North American Palladium Ltd.

NAP’s gold division consisted of the Vezza gold mine, the Sleeping Giant mill, the closed Sleeping Giant mine and a number of nearby exploration projects, all located in the Abitibi region of Quebec. Please refer to note 4 (discontinued operations and assets held for sale) in the Financial Statements for additional information regarding the gold division.

FINANCIAL CONDITION, CASH FLOWS, LIQUIDITY AND CAPITAL RESOURCES

Sources and Uses of Cash

($millions)	2014			2013
Cash provided by operations prior to changes in non-cash working capital	$	41.7		$	6.7
Changes in non-cash working capital		(53.2	)		(0.2	)
Cash provided by (used in) operations		(11.5	)		6.5
Cash provided by financing		29.4			71.3
Cash used in investing		(23.6	)		(108.3	)
Decrease in cash from continuing operations		(5.7	)		(30.5	)
Net cash provided by discontinued operations		—			20.1
Decrease in cash and cash equivalents	$	(5.7	)	$	(10.4	)

Operating Activities

For 2014, cash provided by operations prior to changes in non-cash working capital was $41.7 million compared to $6.7 million in 2013. The 2014 increase of $35.0 million was primarily due to a $66.9 million increase in revenue and a $4.0 million decrease in exploration expenses partially offset by a $23.2 million increase in production costs.

Changes in non-cash working capital for 2014 resulted in a use of cash of $53.2 million compared to $0.2 million in 2013. The 2014 increased use of $53.0 million was primarily due to increases in accounts receivable of $52.3 million and an increase in cash settlements of accounts payable and accrued liabilities of $3.3 million partially offset by a decrease of other assets of $3.5 million.

Financing Activities and Liquidity

For 2014, financing activities resulted in a source of cash of $29.4 million compared to $71.3 million in 2013. In 2014, financing activities consisted primarily of $61.2 million of net proceeds from convertible debentures issued (that have largely been converted into equity), $15.9 million drawdown on a credit facility and $41.4 million of interest paid. In 2013, financing activities consisted primarily of $147.8 million relating to the issuance of the senior secured term loan and $18.9 million related to the issuance of flow-through common shares, partially offset by repayments of senior secured notes of $79.2 million, finance lease payments of $2.9 million, interest payments of $8.4 million and $1.7 million relating to the settlement of palladium warrants.

Investing Activities

Investing activities used cash of $23.6 million in 2014 compared to $108.3 million in 2013. The expenditures in 2014 and 2013 were primarily due to additions to mining interests.

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Liquidity and Capital Resources

FINANCIAL CONDITION

($millions)	As at December 31 2014		As at December 31 2013
Cash balance	$	4.1	$	9.8
Adjusted net working capital (deficit) surplus1		20.5		(0.5	)
Total debt		281.7		239.1
Shareholders’ equity		224.4		222.5

¹  Non-IFRS measure. Please refer to Non-IFRS Measures on pages 22-24.

As at December 31, 2014, the Company had cash and cash equivalents of $4.1 million compared to $9.8 million as at December 31, 2013. The change year over year is due to the sources and uses of cash as noted above. The funds are deposited with major Canadian chartered banks.

The Company has, subject to a borrowing base cap, a US$60.0 million credit facility that is secured by first priority on the Company’s accounts receivables and inventory and second priority on the property, plant and equipment and may be used for working capital liquidity and general corporate purposes. In July 2014, the Company extended its US$60 million credit facility to July 3, 2015 and as at December 31, 2014, the borrowing base calculation limited the credit facility to a maximum of US$51.7 million of which US$44.7 million was utilized including US$13.3 million of letters of credit.

In October 2014, holders of the remaining 12,000 of the Company’s palladium warrants exercised their warrants. In settlement of the warrants, the Company paid approximately $1.1 million in cash. As at February 18, 2015, no palladium warrants remained outstanding.

In July 2014, the Company paid US$23.4 million to its senior secured term loan lender representing US$16.2 million of accrued interest and US$7.2 million of associated pre-payment fee. Effective June 30, 2014, the Company reverted to a 15% annual interest rate on the senior secured term loan and made US$6.5 million interest payments on each of September 30, 2014 and December 31, 2014.

In the second quarter of 2014, the Company closed $35.0 million gross principal amount of convertible unsecured subordinated debentures (the “Tranche 2 Debentures”) of the Company at a price of $1,000 per debenture, including approximately 18.9 million warrants (the “Tranche 2 Warrants”). The conversion price of the Tranche 2 Debentures is $0.4629 per share and the exercise price of the Tranche 2 Warrants is $0.5786 per share. The Tranche 2 Debentures mature on April 11, 2019 and bear interest at an annual rate of 7.5%. Holders may convert their Tranche 2 Debentures into common shares of NAP at any time at a conversion rate of approximately 2,160 Common Shares per $1,000 principal amount of Tranche 2 Debentures. Holders converting their debentures will receive all accrued and unpaid interest, as well as interest that would have been paid if the debenture were held through to maturity (the “Tranche 2 Make Whole Amount”). At the Company’s option, interest and Tranche 2 Make-Whole Amounts can be paid in common shares. The Tranche 2 Warrants entitle the holders to purchase up to 25.0% of the number of common shares of the Company into which the principal amount of the Tranche 2 Debentures purchased by the holders are convertible at the initial fixed conversion price at any time before the second anniversary of the Tranche 2 Debenture closing date.

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North American Palladium Ltd.

In the first quarter of 2014, the Company closed an aggregate of $32.0 million gross principal amount of convertible unsecured subordinated debentures (the “Tranche 1 Debentures”) of the Company at a price of $1,000 per debenture, including approximately 16.8 million warrants (the “Tranche 1 Warrants”). The conversion price of the Tranche 1 Debentures is $0.635 per share and the exercise price of the Tranche 1 Warrants was initially $0.762 per share and has been adjusted to $0.5786 per share (pursuant to Tranche 1 Warrant terms). The Tranche 1 Debentures mature on January 31, 2019 and bear interest at an annual rate of 7.5%. Holders may convert their Tranche 1 Debentures into common shares of NAP at any time at a conversion rate of approximately 1,575 Common Shares per $1,000 principal amount of Tranche 1 Debentures. Holders converting their debentures will receive all accrued and unpaid interest, as well as interest that would have been paid if the debenture were held through to maturity (the “Tranche 1 Make Whole Amount”). At the Company’s option, interest and Tranche 1 Make-Whole Amounts can be paid in common shares. The Tranche 1 Warrants entitle the holders to purchase up to 33.33% of the number of common shares of the Company into which the principal amount of the Tranche 1 Debentures purchased by the holders are convertible at the initial fixed conversion price at any time before the third anniversary of the date that shareholder approval is received. Shareholder approval for the Tranche 1 Warrants was obtained on March 28, 2014.

As at February 18, 2015, $66.0 million of the Tranche 1 Debentures and the Tranche 2 Debentures had been converted resulting in the issuance of a total of 188.5 million common shares pursuant to the conversion and make whole provisions of the convertible debentures.

On November 29, 2013, the Company amended its US$130 million senior secured term loan resulting in an additional advance of US$21.4 million of cash to support working capital needs and continue funding operating and capital expenditures at its LDI mine. The cash received consists of an additional US$15 million added to the existing facility and a refund of US$6.4 million of cash interest previously paid.

Pursuant to the amendment, the interest rate was recalculated as if NAP had elected to accrue interest on the loan from the date of the original closing on June 7, 2013, resulting in a 4% increase of the interest rate from 15% to 19% until the Company reverts to cash interest payments. After the Company reverts to cash interest payments, and interest and fees which have been deferred are paid, the interest rate returns to 15% per annum on the principal amount outstanding.

In July 2013, the Company issued approximately 8.6 million of flow-through common shares at a price of $1.164 per share for net proceeds of approximately $9.5 million. In June 2013, the Company issued approximately 8.7 million of flow-through common shares at a price of $1.155 per share for net proceeds of approximately $9.6 million. The Company was required to spend the aggregate gross proceeds of $20.0 million on eligible exploration and mine development expenditures, which expenditures must be renounced to investors in 2013. As at December 31, 2013, the full gross proceeds had been spent.

In June 2013, holders of 60,000 of the Company’s 72,000 palladium warrants exercised their warrants. In settlement of the warrants, the Company issued approximately 0.6 million common shares at an average price of approximately $1.11 per share in June and paid approximately $1.7 million in cash in July.

In June 2013, the Company completed a US$130 million secured term loan financing that bears interest at 15% per annum and is due June 7, 2017. A portion of the proceeds from the term loan were used to repay existing senior indebtedness. The loan is secured by first priority security on the fixed assets and second priority security on accounts receivable and inventory. The Company has the option to accrue interest during the first two years of the loan; in which case, the interest rate on the loan and accrued interest would increase by 4%. The loan contains covenants typical of this type of facility including senior debt to EBITDA ratios, minimum tangible net worth requirements and capital expenditure limits.

In June 2013, the Company extended its US$60 million revolving operating line of credit by an additional year to July 4, 2014. The credit facility is secured by a first priority security on the Company’s accounts receivables and inventories and a second priority security on all other assets.

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North American Palladium Ltd.

The Company’s senior secured term loan and credit facility contain several financial covenants which, if not met, would result in an event of default. This debt also includes certain other covenants, including limits on liens, material adverse change provisions and cross-default provisions. Certain events of default result in this debt becoming immediately due. Other events of default entitle the lender to demand repayment. At December 31, 2013, the Company was in violation of certain covenants of its senior secured term loan and credit facility for which waivers were not obtained from the lenders until subsequent to the year-end reporting date. At December 31, 2014, the Company was in compliance with all covenants.

The Company’s liquidity may be adversely affected by operating performance, a downturn in capital market conditions impacting access to capital markets or entity specific conditions. The Company’s liquidity is dependent on a number of variables including, but not limited to, metal prices, operational costs, capital expenditures, and meeting production targets. Adverse changes in any of these variables may impact the Company’s liquidity position. The Company expects cash flows from operations to be sufficient to support the Company’s normal operating requirements, including capital expenditures and debt service payments, for the next 12 months.

The Company has $18.8 million of finance leases funding equipment for operations. Please also see the contractual obligations below for additional commitments.

Contractual Obligations

Contractual obligations are comprised as follows:

As at December 31, 2014	Payments Due by Period
($millions)	Total		1-3 Years		3-5 Years		5+ Years
Credit facility	$	36.8	$	36.8	$	—	$	—
Finance lease obligations		18.8		14.6		4.2		—
Operating leases		2.8		2.8		—		—
Long term debt		226.1		7.3		218.8		—
Purchase obligations		5.1		5.1		—		—
	$	289.6	$	66.6	$	223.0	$	—

In addition to the above, the Company has asset retirement obligations at December 31, 2014 in the amount of $15.8 million for the LDI Mine, contractual obligations reflected in accounts payable and obligations related to its credit facility and long-term debt. The Company obtained letters of credit of $14.1 million as financial surety for these future outlays.

Contingencies and Commitments

Please refer to notes 17 and 20 of the Company’s Financial Statements.

Related Party Transactions

There were no related party transactions for the period ended December 31, 2014.

OUTSTANDING SHARE DATA

As of February 18, 2015, there were 391,504,431 common shares of the Company outstanding. In addition, there were options outstanding pursuant to the Corporate Stock Option Plan entitling holders thereof to acquire 5,415,342 common shares of the Company at a weighted average exercise price of $0.97 per share.

At February 18, 2015, $1.0 million and $43.0 million of 2014 and 2012 convertible debentures were outstanding and were convertible into approximately 3.2 million and 14.8 million common shares respectively.

In conjunction with the 2014 convertible debentures, approximately 35.7 million common share purchase warrants at an exercise price of $0.5786 per share were issued and remain outstanding as of February 18, 2015.

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North American Palladium Ltd.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Critical accounting policies generally include estimates that are highly uncertain and for which changes in those estimates could materially impact the Company’s financial statements. The following accounting policies are considered critical:

a. Use of estimates

The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgments, estimates, and assumptions that affect the application of accounting policies and the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the year. Significant estimates and assumptions relate to recoverability of mining operations and mineral exploration properties. While management believes that these estimates and assumptions are reasonable, actual results could vary significantly.

Certain assumptions are dependent upon reserves, which represent the estimated amount of ore that can be economically and legally extracted from the Company’s properties. In order to estimate reserves, assumptions are required about a range of geological, technical and economic factors, including quantities, grades, production techniques, recovery rates, production costs, transportation costs, commodity prices and exchange rates. Estimating the quantity and/or grade of reserves requires the size, shape and depth of ore bodies to be determined by analyzing geological data such as drilling samples. This process may require complex and difficult geological judgments to interpret the data. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period they are determined and in any future periods affected.

Because the economic assumptions used to estimate reserves change from period to period, and because additional geological data is generated during the course of operations, estimates of reserves may change from period to period. Changes in reported reserves may affect the Company’s financial results and financial position in a number of ways, including the following:

• Asset carrying values including mining interests may be affected due to changes in estimated future cash flows;

• Depreciation and amortization charged in the statement of operations may change or be impacted where such charges are determined by the units of production basis, or where the useful economic lives of assets change;

• Decommissioning, site restoration and environmental provisions may change where changes in estimated reserves affect expectations about the timing or cost of these activities; and

• The carrying value of deferred tax assets may change due to changes in estimates of the likely recovery of the tax benefits.

b. Impairment assessments of long-lived assets

The carrying amounts of the Company’s non-financial assets, excluding inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. Impairment is assessed at the level of cash-generating units (“CGUs”). An impairment loss is recognized in the Consolidated Statements of Operations and Comprehensive Loss for any excess of carrying amount over the recoverable amount.

Impairment is determined for an individual asset unless the asset does not generate cash inflows that are independent of those generated from other assets or groups of assets, in which case, the individual assets are grouped together into CGUs for impairment purposes.

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The recoverable amount of an asset or CGU is the greater of its “value in use”, defined as the discounted present value of the future cash flows expected to arise from its continuing use and its ultimate disposal, and its “fair value less costs to sell”, defined as the best estimate of the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date, less costs of disposal. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

An impairment loss is recognized in the Consolidated Statements of Operations and Comprehensive Loss if the carrying amount of an asset or a CGU exceeds its estimated recoverable amount.

Impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss on non-financial assets other than goodwill is reversed if there has been a change in the estimates used to determine the recoverable amount, only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of amortization, if no impairment loss had been recognized.

c. Depreciation and amortization of mining interests

Mining interests relating to plant and equipment, mining leases and claims, royalty interests, and other development costs are recorded at cost with depreciation and amortization provided on the unit-of-production method over the estimated remaining ounces of palladium to be produced based on the proven and probable reserves or, in the event that the Company is mining resources, an appropriate estimate of the resources mined or expected to be mined.

Mining interests relating to small vehicles and certain machinery with a determinable expected life are recorded at cost with depreciation provided on a straight-line basis over their estimated useful lives, ranging from three to seven years, which most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. Straight-line depreciation is calculated over the depreciable amount, which is the cost of an asset, less its residual value.

Significant components of individual assets are assessed and, if a component has a useful life that is different from the remainder of that asset, that component is depreciated separately using the unit-of-production or straight-line method as appropriate. Costs relating to land are not amortized.

Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Company will obtain ownership by the end of the lease term.

Depreciation methods, useful lives and residual values are reviewed at each financial year-end and adjusted if appropriate.

d. Revenue recognition

Revenue from the sale of metals in the course of ordinary activities is measured at the fair value of the consideration received or receivable, net of volume adjustments. Revenue is recognized when persuasive evidence exists, usually in the form of an executed sales agreement, that the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, there is no continuing management involvement with the goods, and the amount of revenue can be measured reliably. The timing of the transfers of risks and rewards varies depending on the individual terms of the contract of sale.

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North American Palladium Ltd.

Revenue from the sale of palladium and by-product metals from the LDI Mine is provisionally recognized based on quoted market prices upon the delivery of concentrate to the smelter or designated shipping point, which is when title transfers and significant rights and obligations of ownership pass. The Company’s smelter contract provides for final prices to be determined by quoted market prices in a period subsequent to the date of concentrate delivery. Variations from the provisionally priced sales are recognized as revenue adjustments until final pricing is determined. Accounts receivable are recorded net of estimated treatment and refining costs, which are subject to final assay adjustments. Subsequent adjustments to provisional pricing amounts due to changes in metal prices and foreign exchange are disclosed separately from initial revenues in the notes to the financial statements.

e. Asset retirement obligations

In accordance with Company policies, asset retirement obligations relating to legal and constructive obligations for future site reclamation and closure of the Company’s mine sites are recognized when incurred and a liability and corresponding asset are recorded at management’s best estimate. Estimated closure and restoration costs are provided for in the accounting period when the obligation arising from the related disturbance occurs.

The amount of any liability recognized is estimated based on the risk-adjusted costs required to settle present obligations, discounted using a pre-tax risk-free discount rate consistent with the time period of expected cash flows. When the liability is initially recorded, a corresponding asset retirement cost is recognized as an addition to mining interests and amortized using the unit of production method.

The liability for each mine site is accreted over time and the accretion charges are recognized as an interest cost in the Consolidated Statements of Operations and Comprehensive Loss. The liability is subject to re-measurement at each reporting date based on changes in discount rates and timing or amounts of the costs to be incurred. Changes in the liability, other than accretion charges, relating to mine rehabilitation and restoration obligations, which are not the result of current production of inventory, are added to or deducted from the carrying value of the related asset retirement cost in the reporting period recognized. If the change results in a reduction of the obligation in excess of the carrying value of the related asset retirement cost, the excess balance is recognized as a recovery through profit or loss in the period.

Adoption of New Accounting Standards

The following new accounting standards have been adopted by the Company.

IAS 32 Financial Instruments: Presentation

This standard is amended to clarify requirements for offsetting of financial assets and financial liabilities. The amendment is effective for annual periods beginning on or after January 1, 2014. This amendment did not have a material impact on the consolidated financial statements of the Company.

IAS 36 Recoverable Amounts

This standard was amended in May 2013 to change the disclosure required when an impairment loss is recognized or reversed. The amendments require the disclosure of the recoverable amount of an asset or cash generating unit at the time an impairment loss has been recognized or reversed and detailed disclosure of how the associated fair value less costs of disposal has been determined. The amendments are effective for annual periods beginning on or after January 1, 2014 with earlier adoption permitted. This amendment did not have a material impact on the consolidated financial statements of the Company.

IFRIC 21 Accounting for Levies Imposed by Governments

This interpretation provides guidance on the obligating event giving rise to a liability in connection with a levy imposed by a government, and clarifies that the obligating event is the activity that triggers the payment of the levy as identified by the legislation. The interpretation is effective for annual periods beginning on or after January 1, 2014. This amendment did not have a material impact on the consolidated financial statements of the Company.

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North American Palladium Ltd.

New standards and interpretations not yet adopted

The following new standards, amendments to standards and interpretations are not yet effective for the year ended December 31, 2014 or have otherwise not yet been adopted by the Company. The Company is evaluating the impact, if any; adoption of the standards will have on the disclosures in the Company’s consolidated financial statements:

IAS 16 and IAS 38 Clarification of acceptable methods of depreciation and amortization

This pronouncement amends IAS 16 Property Plant and Equipment and IAS 38 Intangible Assets to (i) clarify that the use of a revenue-based depreciation method is not appropriate for property, plant and equipment, and (ii) provide a rebuttal presumption for intangible assets. The amendment is effective for years beginning on or after January 1, 2016. This amendment is not expected to have a material impact on the consolidated financial statements of the Company.

IFRS 15 Revenue from contracts with customers

This new standard on revenue recognition supercedes IAS 18 Revenue, IAS 11 Construction Contracts, and related interpretations. The amendment is effective for years beginning on or after January 1, 2017. The Company is presently evaluating the potential impact of this new standard on the consolidated financial statements of the Company.

IFRS 9 Financial Instruments: Classification and Measurement

On July 24, 2014 the IASB issued the complete IFRS 9 (IFRS 9 (2014)) which will replace IAS 39, Financial Instruments: Recognition and Measurement. In November 2009 the IASB issued the first version of IFRS 9, Financial Instruments (IFRS 9 (2009)) and subsequently issued various amendments in October 2010, (IFRS 9 Financial Instruments (2010)) and November 2013 (IFRS 9 Financial Instruments (2013)).

IFRS 9 (2009) introduces new requirements for the classification and measurement of financial assets. Under IFRS 9 (2009), financial assets are classified and measured based on the business model in which they are held and the characteristics of their contractual cash flows. This includes the introduction of a third measurement category for financial assets – fair value through other comprehensive income.

IFRS 9 (2010) introduces additional changes relating to financial liabilities.

IFRS 9 (2013) includes a new general hedge accounting standard which will align hedge accounting more closely with risk management. This new standard does not fundamentally change the types of hedging relationships or the requirement to measure and recognize ineffectiveness, however it will provide more hedging strategies that are used for risk management to qualify for hedge accounting and introduce more judgment to assess the effectiveness of a hedging relationship.

Special transitional requirements have been set for the application of the new general hedging model.

IFRS 9 (2014) includes finalized guidance on the classification and measurement of financial assets. The final standard also amends the impairment model by introducing a new ‘expected credit loss’ model for calculating impairment, and new general hedge accounting requirements.

The mandatory effective date of IFRS 9 is for annual periods beginning on or after January 1, 2018 and must be applied retrospectively with some exemptions. Early adoption is permitted. The restatement of prior periods is not required and is only permitted if information is available without the use of hindsight. The Company is presently evaluating the impact of adopting this standard and does not intend to early adopt IFRS 9 (2009), IFRS 9 (2010) or IFRS 9 (2013) and/or IFRS 9 (2014) in its financial statements for the annual period beginning on January 1, 2015.

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North American Palladium Ltd.

RISKS AND UNCERTAINTIES

The risks and uncertainties are discussed within the Company’s most recent Form 40-F/Annual Information Form on file with the SEC and Canadian provincial securities regulatory authorities, the Company’s Short Form Base Shelf Prospectus filed on December 5, 2014.

INTERNAL CONTROLS

Disclosure Controls and Procedures

Management is responsible for the information disclosed in this MD&A and has in place the appropriate information systems, procedures and controls to ensure that information used internally by management and disclosed externally is, in all material respects, complete and reliable.

For the year ended December 31, 2014, the Chief Executive Officer and Chief Financial Officer certify that they have designed, or caused to be designed under their supervision, disclosure controls and procedures to provide reasonable assurance that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities.

The disclosure controls and procedures are evaluated annually through regular internal reviews which are carried out under the supervision of, and with the participation of, the Company’s management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls were effective as at December 31, 2014.

Internal Control over Financial Reporting

For the year ended December 31, 2014, the Chief Executive Officer and Chief Financial Officer certify that they have designed, or caused to be designed under their supervision, internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with IFRS as issued by the IASB.

There have been no changes in the Company’s internal controls over the financial reporting that occurred during the year ended December 31, 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Management is responsible for establishing and maintaining adequate internal controls over financial reporting. Internal control over financial reporting, no matter how well designed, has inherent limitations and can only provide reasonable assurance, not absolute assurance, with respect to the preparation and fair presentation of published financial statements and management does not expect such controls will prevent or detect all misstatements due to error or fraud. The Company is continually evolving and enhancing its systems of controls and procedures.

Under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer, management performs regular internal reviews and conducts an annual evaluation of the effectiveness of its internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these internal controls over financial reporting were effective as of December 31, 2014.

OTHER INFORMATION

Additional information regarding the Company is included in the Company’s Annual Information Form and Annual Report on Form 40-F, which are filed with the SEC and the provincial securities regulatory authorities, respectively. A copy of the Company’s Annual Information Form is posted on the SEDAR website at www.sedar.com. A copy of the Annual Report on Form 40-F can be obtained from the SEC’s website at www.sec.gov.

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North American Palladium Ltd.

NON-IFRS MEASURES

This MD&A refers to cash cost per ounce, adjusted net loss, EBITDA and adjusted EBITDA which are not recognized measures under IFRS. Such Non-IFRS financial measures do not have any standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other issuers. Management uses these measures internally. The use of these measures enables management to better assess performance trends. Management understands that a number of investors, and others who follow the Company’s performance, assess performance in this way. Management believes that these measures better reflect the Company’s performance and are better indications of its expected performance in future periods. This data is intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS.

2013 was a transition year for the Company as it was sinking the shaft and completing related infrastructure at the same time it was developing and transitioning to mining the Offset zone. As a result, the 2013 financial results would not be directly comparable to the prior or future years.

The following tables reconcile these non-IFRS measures to the most directly comparable IFRS measures:

Cash Cost Per Ounce of Palladium

The Company uses this measure internally to evaluate the underlying operating performance of the Company for the reporting periods presented. The Company believes that providing cash cost per ounce allows the ability to better evaluate the results of the underlying business of the Company.

Cash cost per ounce include mine site operating costs such as mining, processing, administration and royalties, but are exclusive of depreciation, amortization, reclamation, capital and exploration costs. Cash cost per ounce calculation is reduced by any by-product revenue and is then divided by ounces sold to arrive at the by-product cash cost per ounce of sales. This measure, along with revenues, is considered to be a key indicator of a Company’s ability to generate operating earnings and cash flow from its mining operations.

The Company’s primary operation relates to the extraction of palladium metal. Therefore, all other metals extracted in conjunction with the palladium metal are considered to be a by-product credit for the purposes of the cash cost calculation.

Reconciliation of Palladium Cash Cost per Ounce

	For the three months ended								For the year ended December 31
($millions except ounce and per ounce amounts)	Dec 31 2014		Sep 30 2014		Jun 30 2014		Mar 31 2014		2014		2013
Production costs including overhead	$	40.5	$	30.1	$	30.4	$	29.7	$	130.7	$	107.5
Smelting, refining and freight costs		6.7		4.0		4.1		4.2		19.0		14.0
Royalty expense		3.0		1.8		2.2		2.1		9.1		6.5
Operational expenses		50.2		35.9		36.7		36.0		158.8		128.0
Less by-product metal revenue		19.5		12.5		14.1		14.6		60.7		50.2
	$	30.7	$	23.4	$	22.6	$	21.4	$	98.1	$	77.8
Divided by ounces of palladium sold		57,256		36,430		40,716		39,485		173,887		134,955
Cash cost per ounce (CDN$)	$	537	$	642	$	554	$	541	$	564	$	577
Average exchange rate (CDN$1 – US$)		0.88		0.92		0.92		0.91		0.91		0.97
Cash cost per ounce (US$), net of by-product credits	$	473	$	589	$	510	$	492	$	513	$	560

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North American Palladium Ltd.

Adjusted EBITDA

The Company believes that EBITDA and Adjusted EBITDA are valuable indicators of the Company’s ability to generate operating cash flow to fund working capital needs, service debt obligations, and fund capital expenditures.

EBITDA excludes the impact of the cost of financing activities and taxes, and the effects of changes in operating working capital balances, and therefore is not necessarily indicative of operating profit or cash flow from operations as determined under IFRS.

Other companies may calculate EBITDA differently. Adjusted EBITDA is a non-IFRS financial measure, which excludes the following from loss: income and mining tax expense; interest expense and other costs, net; depreciation and amortization; exploration; mine start-up and closure costs; asset impairment charges and insurance recoveries; one-time costs (mine restoration costs due to flood and retirement payments); and, foreign exchange loss (gain).

	For the three months ended												For the year ended December 31
($millions)	Dec 31 2014			Sep 30 2014			Jun 30 2014			Mar 31 2014			2014			2013
Loss and comprehensive loss from continuing operations for the year	$	(11.2	)	$	(18.8	)	$	(10.0	)	$	(26.7	)	$	(66.7	)	$	(48.7	)
Income and mining tax recovery		—			—			—			—			—			(2.2	)
Interest and other income		(0.5	)		(1.5	)		(2.7	)		—			(4.7	)		—
Interest expense and other costs		10.1			10.2			16.0			13.3			49.6			6.9
Financing costs		—			(0.9	)		4.4			4.0			7.5			3.7
Loss on extinguishment of debt		—			—			—			—			—			11.0
Depreciation and amortization		12.2			6.9			8.2			10.4			37.7			25.5
EBITDA	$	10.6		$	(4.1	)	$	15.9		$	1.0		$	23.4		$	(3.8	)
Exploration		3.1			2.6			1.9			0.7			8.3			12.3
Insurance recoveries, net of mine restoration costs and retirement payments		—			—			—			—			—			(1.3	)
Inventory price adjustment		—			—			—			—			—			0.7
Foreign exchange loss (gain)		7.9			9.8			(7.4	)		8.0			18.3			7.4
Adjusted EBITDA	$	21.6		$	8.3		$	10.4		$	9.7		$	50.0		$	15.3

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North American Palladium Ltd.

Adjusted Net Working Capital and Proforma Condensed Balance Sheet

This MD&A refers to adjusted net working capital which is not a recognized measure under IFRS. The table below also refers to adjusted current liabilities and adjusted non-current liabilities which are also not recognized measures under IFRS. Such Non-IFRS financial measures do not have any standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other issuers. Adjusted net working capital, adjusted current liabilities and adjusted non-current liabilities are intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS.

As at December 31, 2013, the Company had not obtained a waiver from Brookfield regarding a cured covenant breach that occurred prior to year end. Such waivers were received by the Company subsequent to December 31, 2013. Management believes the balance sheet presentation does not reflect the liquidity position of the Company at December 31, 2013. Had the waiver been obtained prior to year end, the Company’s proforma condensed consolidated balance sheet and adjusted net working capital (deficit) surplus would have been:

($millions)	As at December 31 2014(1)		Proforma As at December 31 2013(1)
Current assets	$	98.0	$	69.6
Non-current assets		452.8		456.2
	$	550.8	$	525.8
Adjusted current liabilities(2)	$	77.5	$	70.1
Adjusted non-current liabilities(3)		248.9		233.2
Shareholders’ equity		224.4		222.5
	$	550.8	$	525.8
Net working capital (deficit)	$	20.5	$	(174.2	)
Adjusted net working capital (deficit) surplus(4)	$	20.5	$	(0.5	)

⁽¹⁾  No non-IFRS adjustments have been made to the December 31, 2014. They have been provided for comparison purposes only. Other than as noted by the term “adjusted” and footnotes, amounts shown as at December 31, 2013 are IFRS amounts.

⁽²⁾  IFRS current liabilities as at December 31, 2013 totaled $243.8 million After reducing for the current portion of long-term debt of $173.7 million, adjusted current liabilities amount to $70.1 million.

⁽³⁾  IFRS non-current liabilities as at December 31, 2013 totaled $59.5 million. After increasing for the current portion of long-term debt of $173.7 million, adjusted non-current liabilities amount to $233.2 million.

⁽⁴⁾  Adjusted net working capital (deficit) surplus is determined by subtracting adjusted current liabilities from current assets.

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2014 Annual Report

EX-2

Exhibit 2

North American Palladium Ltd.

Management’s Responsibility

for Financial Statements

The accompanying consolidated financial statements have been prepared by management in accordance with International Financial Reporting Standards (IFRS) as issued by the IASB. Financial statements include certain amounts based on estimates and judgments. When an alternative method exists under IFRS, management has chosen that which it deems most appropriate in the circumstances in order to ensure that the consolidated financial statements are presented fairly, in all material respects, in accordance with IFRS. The financial information presented elsewhere in the annual report is consistent with that in the consolidated financial statements.

The Company maintains adequate systems of internal accounting and administrative controls. Such systems are designed to provide reasonable assurance that transactions are properly authorized and recorded, the Company’s assets are appropriately accounted for and adequately safeguarded and that the financial information is relevant and reliable.

The Board of Directors of the Company is responsible for ensuring that management fulfills its responsibilities for financial reporting, and is ultimately responsible for reviewing and approving the consolidated financial statements and the accompanying management’s discussion and analysis. The Board of Directors carries out this responsibility principally through its Audit Committee.

The Audit Committee is appointed by the Board of Directors and all of its members are non-management directors. The Audit Committee meets periodically with management and the external auditors to discuss internal controls, auditing matters and financial reporting issues, and to satisfy itself that each party is properly discharging its responsibilities. The Audit Committee also reviews the consolidated financial statements, management’s discussion and analysis, the external auditors’ report, examines the fees and expenses for audit services, and considers the engagement or reappointment of the external auditors. The Audit Committee reports its findings to the Board of Directors for its consideration when approving the consolidated financial statements for issuance to the shareholders. KPMG LLP, the external auditors, have full and free access to the Audit Committee.

Toronto, Canada
February 18, 2015
Phil du Toit	Dave Langille
CEO	CFO

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2014 Annual Report

	KPMG LLP	Telephone	(416) 777-8500
	Bay Adelaide Centre	Fax	(416) 777-8818
	333 Bay Street Suite 4600	Internet	www.kpmg.ca
	Toronto ON M5H 2S5
	Canada

INDEPENDENT AUDITORS’ REPORT

To the Shareholders of North American Palladium Ltd.

We have audited the accompanying consolidated financial statements of North American Palladium Ltd., which comprise the consolidated balance sheets as at December 31, 2014 and December 31, 2013, the consolidated statements of operations and comprehensive loss, shareholders’ equity and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information.

Management’s Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of North American Palladium Ltd. as at December 31, 2014 and December 31, 2013, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

Chartered Professional Accountants, Licensed Public Accountants

February 18, 2015

Toronto, Canada

KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG

network of independent member firms affiliated with KPMG International Cooperative

(“KPMG International”), a Swiss entity.

KPMG Canada provides services to KPMG LLP.

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2014 Annual Report

North American Palladium Ltd.

Consolidated Balance Sheets

(expressed in millions of Canadian dollars)

	Notes	December 31 2014			December 31 2013
ASSETS
Current Assets
Cash and cash equivalents		$	4.1		$	9.8
Accounts receivable	5		75.4			38.6
Inventories	6		14.9			14.2
Other assets	7		3.6			7.0
Total Current Assets			98.0			69.6
Non-current Assets
Mining interests	8		452.8			456.2
Total Non-current Assets			452.8			456.2
Total Assets		$	550.8		$	525.8
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable and accrued liabilities		$	28.8		$	48.8
Credit facility	10		36.8			17.8
Current portion of obligations under finance leases	11		4.6			3.0
Current portion of long-term debt	12		7.3			173.7
Current derivative liability	12		—			0.5
Total Current Liabilities			77.5			243.8
Non-current Liabilities
Income taxes payable			0.1			1.3
Asset retirement obligations	9		15.8			13.6
Obligations under finance leases	11		14.2			8.7
Long-term debt	12		218.8			35.9
Total Non-current Liabilities			248.9			59.5
Shareholders’ Equity
Common share capital and purchase warrants	14		866.4			798.4
Stock options and related surplus			9.7			9.1
Equity component of convertible debentures, net of issue costs	12		6.9			6.9
Contributed surplus			8.9			8.9
Deficit			(667.5	)		(600.8	)
Total Shareholders’ Equity			224.4			222.5
Total Liabilities and Shareholders’ Equity		$	550.8		$	525.8

Commitments and contingencies – Notes 17 and 20

Subsequent event – Note 23

See accompanying notes to the consolidated financial statements

On Behalf of the Board of Directors

Robert J. Quinn, Director	Greg Van Staveren, Director

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2014 Annual Report

North American Palladium Ltd.

Consolidated Statements of Operations and

Comprehensive Loss

(expressed in millions of Canadian dollars, except share and per share amounts)

	Notes	2014			2013
Revenue	18	$	220.1		$	153.2
Mining operating expenses
Production costs			130.7			107.5
Smelting, refining and freight costs			19.0			14.0
Royalty expense			9.1			6.5
Depreciation and amortization			37.7			25.5
Inventory pricing adjustment	6		—			0.7
Loss on disposal of equipment			1.7			1.1
Other			—			(1.3	)
Total mining operating expenses			198.2			154.0
Income (loss) from mining operations			21.9			(0.8	)
Other expenses
Exploration			8.3			12.3
General and administration			9.6			10.8
Interest and other income	19		(4.7	)		(2.0	)
Interest expense and other costs	19		49.6			6.9
Financing costs			7.5			3.7
Loss on extinguishment of long-term debt	12		—			11.0
Foreign exchange loss			18.3			7.4
Total other expenses			88.6			50.1
Loss from continuing operations before taxes			(66.7	)		(50.9	)
Income tax recovery	21		—			2.2
Loss and comprehensive loss from continuing operations for the year		$	(66.7	)	$	(48.7	)
Income and comprehensive income from discontinued operations for the year	4		—			2.5
Loss and comprehensive loss for the year		$	(66.7	)	$	(46.2	)
Loss per share
Basic and Diluted	14(e)	$	(0.20	)	$	(0.25	)
Loss from continuing operations per share
Basic and Diluted		$	(0.20	)	$	(0.26	)
Income from discontinued operations per share
Basic and Diluted			—		$	0.01
Weighted average number of shares outstanding
Basic	14(e)		338,818,180			187,150,369
Diluted	14(e)		339,344,513			187,176,329

See accompanying notes to the consolidated financial statements

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North American Palladium Ltd.

Consolidated Statements of Cash Flows

(expressed in millions of Canadian dollars)

	Notes	2014			2013
Cash provided by (used in)
Operations
Loss from continuing operations for the year		$	(66.7	)	$	(48.7	)
Operating items not involving cash
Depreciation and amortization			37.7			25.5
Inventory pricing adjustment	6		—			0.7
Accretion expense	19		3.2			3.6
Loss on extinguishment of long-term debt			—			11.0
Share-based compensation and employee benefits	14(g)		2.0			1.4
Unrealized foreign exchange loss			15.7			7.0
Loss on disposal of equipment			1.7			1.1
Interest expense and other			40.6			1.4
Financing costs			7.5			3.7
			41.7			6.7
Changes in non-cash working capital	22		(53.2	)		(0.2	)
			(11.5	)		6.5
Financing Activities
Issuance of common shares and warrants, net of issue costs	14(c)		—			18.9
Issuance of convertible debentures, net of issue costs	12		61.2			—
Credit facility	10		15.9			0.2
Repayment of senior secured notes	12		—			(79.2	)
Settlement of palladium warrants	12		(1.1	)		(1.7	)
Net proceeds of senior secured term loan	12		—			147.8
Repayment of obligations under finance leases	11		(3.4	)		(2.9	)
Interest paid			(41.4	)		(8.4	)
Other			(1.8	)		(3.4	)
			29.4			71.3
Investing Activities
Additions to mining interests, net	8		(23.8	)		(109.5	)
Proceeds on disposal of mining interests, net			0.2			1.2
			(23.6	)		(108.3	)
Decrease in cash from continuing operations			(5.7	)		(30.5	)
Net cash provided by discontinued operations	4		—			20.1
Decrease in cash			(5.7	)		(10.4	)
Cash and cash equivalents, beginning of year			9.8			20.2
Cash and cash equivalents, end of year		$	4.1		$	9.8
Cash and cash equivalents consisting of:
Cash		$	4.1		$	9.8
Foreign exchange included in cash balance		$	0.3		$	0.3

See accompanying notes to the consolidated financial statements

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2014 Annual Report

North American Palladium Ltd.

Consolidated Statements of Shareholders’ Equity

(expressed in millions of Canadian dollars, except share amounts)

	Notes	Number of shares		Capital stock			Stock options		Equity component of convertible debentures		Contributed surplus		Deficit			Total shareholders’ equity
Balance, January 1, 2013			177,127,833	$	776.6		$	9.1	$	6.9	$	8.9	$	(554.6	)	$	246.9
Common shares issued:
Settlement of obligation relating to production targets	14(h)		709,220		1.0			—		—		—		—			1.0
Settlement of NAP Quebec disposal costs	4		203,800		0.3			—		—		—		—			0.3
Private placement of flow-through shares, net of issue costs	14(c)		17,258,337		19.0			—		—		—		—			19.0
Premium on issuance of flow-through shares			—		(0.5	)		—		—		—		—			(0.5	)
Warrants:
Palladium warrants exercised	12		574,738		0.6			—		—		—		—			0.6
Stock based compensation:
Stock-based compensation	14(b)		1,235,996		1.4			—		—		—		—			1.4
Net loss and comprehensive loss for the year ended December 31, 2013			—		—			—		—		—		(46.2	)		(46.2	)
Balance, December 31, 2013			197,109,924	$	798.4		$	9.1	$	6.9	$	8.9	$	(600.8	)	$	222.5
Common shares issued:
Pursuant to conversion of convertible debentures (Tranche 1)	12		76,407,816		30.9			—		—		—		—			30.9
Pursuant to conversion of convertible debentures (Tranche 2)	12		108,972,404		35.7			—		—		—		—			35.7
Stock based compensation:
Stock-based compensation	14(b)(d)		4,024,633		1.4			0.6		—		—		—			2.0
Net loss and comprehensive loss for the year ended December 31, 2014			—		—			—		—		—		(66.7	)		(66.7	)
Balance, December 31, 2014			386,514,777	$	866.4		$	9.7	$	6.9	$	8.9	$	(667.5	)	$	224.4

See accompanying notes to the consolidated financial statements

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North American Palladium Ltd.

Notes to the Consolidated Financial Statements

(expressed in millions of Canadian dollars, except per share amounts and metal prices)

1. NATURE OF OPERATIONS

North American Palladium Ltd. (“NAP”) is domiciled in Canada and was incorporated on September 12, 1991 under the Canadian Business Corporations Act. The address of the Company’s registered office is 200 Bay Street, Suite 2350, Royal Bank Plaza South Tower, Toronto, Ontario, Canada, M5J 2J2. The Company’s 100%-owned subsidiary is Lac des Iles Mines Ltd. (“LDI”).

NAP operates the LDI palladium mine, located northwest of Thunder Bay, Ontario, which started producing palladium in 1993. The Company has transitioned the LDI mine from mining via ramp access to mining via shaft while utilizing bulk mining methods.

The Company also previously held 100% ownership of NAP Quebec Mines Ltd. (“NAP Quebec”), and on March 22, 2013, the Company completed the sale of NAP Quebec resulting in the disposition of all gold division assets. Refer to note 4.

The consolidated financial statements for the Company include the Company and its subsidiary (collectively referred to as the “Company”).

2. BASIS OF PRESENTATION

Statement of Compliance

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”), applicable to the preparation of these financial statements, including IAS 1, Presentation of Financial Statements.

These consolidated financial statements were authorized for issuance by the Board of Directors of the Company on February 18, 2015.

Basis of Measurement

These consolidated financial statements have been prepared on the historical cost basis, except for the following items in the consolidated balance sheet:

(i) Accounts receivable are measured at fair value.

(ii) Financial instruments at fair value through profit or loss are measured at fair value.

(iii) Liabilities for cash-settled share-based payment arrangements are measured at fair value.

Functional and Presentation Currency

These consolidated financial statements are presented in Canadian dollars, which is the Company’s and its subsidiary’s functional currency. All financial information is expressed in millions of Canadian dollars, except share and per share amounts.

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Use of Judgments and Estimates

The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgments, estimates, and assumptions that affect the application of accounting policies and the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the year. Significant estimates and assumptions relate to recoverability of mining operations and mineral exploration properties. While management believes that these estimates and assumptions are reasonable, actual results could vary significantly.

(a) Critical judgments

Information about critical judgments in applying accounting policies that have the most significant effect on the amounts recognized in the consolidated financial statements is included in the following notes:

Note 9 – Asset retirement obligations and reclamation deposits

(b) Key estimates and assumptions

Certain assumptions are dependent upon reserves, which represent the estimated amount of ore that can be economically and legally extracted from the Company’s properties. In order to estimate reserves, assumptions are required about a range of geological, technical and economic factors, including quantities, grades, production techniques, recovery rates, production costs, transportation costs, commodity prices and exchange rates. Estimating the quantity and/or grade of reserves requires the size, shape and depth of ore bodies to be determined by analyzing geological data such as drilling samples. This process may require complex and difficult geological judgments to interpret the data. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period they are determined and in any future periods affected.

Because the economic assumptions used to estimate reserves change from period to period and additional geological data is generated during the course of operations, estimates of reserves may change from period to period. Changes in reported reserves may affect the Company’s financial results and financial position in a number of ways, including the following:

(i) The Company’s estimates of recoverable amounts of mining interests may be affected due to changes in estimated future cash flows;

(ii) Depreciation and amortization charged in the statement of operations may change or be impacted where such charges are determined by the units of production basis, or where the useful economic lives of assets change;

(iii) Decommissioning, site restoration and environmental provisions may change where changes in estimated reserves affect expectations about the timing or cost of these activities; and

(iv) The carrying value of deferred tax assets may change due to changes in estimates of the likely recovery of the tax benefits.

Information about assumptions is included in the following note:

Note 5 – Accounts receivable

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North American Palladium Ltd.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting policies set out below have been applied consistently by all Company’s entities for all periods presented in these consolidated financial statements, unless otherwise indicated.

Basis of Consolidation

These consolidated financial statements include the accounts of NAP and its wholly-owned subsidiary.

(a) Business combinations

The Company measures goodwill as the fair value of the consideration transferred including the recognized amount of any non-controlling interest in the acquiree, less the fair value of the identifiable assets acquired and liabilities assumed, all measured as of the acquisition date. When the excess is negative, a bargain purchase gain is recognized immediately in profit or loss.

The Company elects on a transaction-by-transaction basis whether to measure non-controlling interest at its fair value, or at its proportionate share of the recognized amount of the identifiable net assets, at the acquisition date.

Transaction costs, other than those directly associated with the issue of debt or equity securities, that the Company incurs in connection with a business combination are expensed as incurred.

(b) Subsidiaries

Subsidiaries are entities controlled by NAP. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.

(c) Transactions eliminated on consolidation

Inter-company balances and transactions and any unrealized income and expenses arising from inter-company transactions are eliminated in preparing the consolidated financial statements.

Foreign Currency Translations

The reporting and functional currency of the Company and its subsidiaries is the Canadian dollar. Accordingly, the Company translates monetary assets and liabilities denominated in foreign currency at the rate of exchange prevailing at the consolidated balance sheet dates, non-monetary assets and liabilities denominated in foreign currency at the rate in effect at the date the transaction occurred and revenues and expenses denominated in foreign currency at the exchange rate in effect during the applicable accounting period. All resulting foreign exchange gains and losses are recorded in the Consolidated Statements of Operations and Comprehensive Loss.

Financial Instruments

(a) Non-derivative financial assets

The Company initially recognizes loans and receivables and deposits on the date they originated. All other financial assets (including assets designated at fair value through profit or loss) are recognized initially on the trade date at which the Company becomes a party to the contractual provisions of the instrument.

Financial instruments are measured on initial recognition at fair value plus, in the case of instruments other than those classified as “fair value through profit and loss”, directly attributable transaction costs.

The Company has the following non-derivative financial assets: financial assets at fair value through profit or loss and loans and receivables.

A financial asset is classified at fair value through profit or loss if it is classified as held for trading or is designated as such upon initial recognition. These financial instruments are measured at fair value, and changes therein are recognized in the Consolidated Statements of Operations and Comprehensive Loss. The Company’s accounts receivable from the sale of palladium and by-product metals from the LDI mine primarily represent the material financial instruments which have been recorded at fair value through profit or loss (see note 5).

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Financial assets classified as loans and receivables are measured subsequent to initial recognition at amortized cost using the effective interest method, less any impairment losses. The Company’s loan and receivables are included in other assets (see note 7). Cash and cash equivalents are stated at fair value and include cash on account less outstanding cheques, demand deposits and short-term guaranteed investments with original maturities of three months or less.

(b) Non-derivative financial liabilities

The Company initially recognizes debt securities issued and subordinated liabilities on the date they originated. All other financial liabilities (including liabilities designated at fair value through profit or loss) are recognized initially on the trade date at which the Company becomes a party to the contractual provisions of the instrument.

The Company derecognizes a financial liability when its contractual obligations are discharged, cancelled or expired. Financial assets and liabilities are offset and the net amount presented in the consolidated balance sheet when, and only when, the Company has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously.

The Company has the following non-derivative financial liabilities: long-term debt, finance leases, loans and borrowings, bank overdrafts, credit facilities, and trade and other payables.

Such financial liabilities are designated initially at fair value through profit or loss, and recognized at fair value plus any directly attributable transaction costs. Subsequent to initial recognition these financial liabilities are designated at amortized cost and are measured at amortized cost using the effective interest method.

(c) Derivative financial instruments

The Company holds derivative financial instruments to minimize its foreign currency and market price exposures. Embedded derivatives are separated from the host contract and accounted for separately if the economic characteristics and risks of the host contract and the embedded derivative are not closely related, a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative, and the combined instrument is not measured at fair value through profit or loss.

Derivatives are recognized initially at fair value and any associated transaction costs are recognized in profit or loss as incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are accounted for as described below.

Separable embedded derivatives

Changes in the fair value of separable embedded derivatives are recognized immediately in profit or loss.

Other non-trading derivatives

When a derivative financial instrument is not held for trading and is not designated in a qualifying hedge relationship, all changes in its fair value are recognized immediately in profit or loss.

Inventories

Concentrate, crushed and broken ore stockpiles, and gold inventory are valued at the lower of average production cost (including an allocation of the depreciation of production related assets) and 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, if any, is shown as a long-term asset. Supplies inventory is valued at the lower of average cost and net realizable value.

Gold inventory relating to discontinued operations was comprised of unprocessed ore either in stockpiles or bins, unrecovered gold in either carbon or solution within the milling circuit, and gold-silver doré bars produced but not sold as at the reporting date.

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Mining Interests

Recognition and measurement

Property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses.

Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the assets to a working condition for their intended use, the costs of dismantling and removing the items and restoring the site on which they are located, and borrowing costs on qualifying assets. Where funds used to finance a major project form part of general borrowings, the Company capitalizes interest on those borrowings proportionate to the project funds used.

When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items or major components of property, plant and equipment.

Spare parts and servicing equipment are usually carried as inventory and recognized in profit or loss as consumed. However, major spare parts and stand-by equipment qualify as property, plant and equipment when the Company expects to use them during more than one period. Similarly, if the spare parts and servicing equipment can be used only in connection with an item of property, plant and equipment, they are accounted for as property, plant and equipment.

Exploration costs relating to properties are charged to earnings in the year in which they are incurred. When it is determined that a mining property can be economically developed as a result of reserve potential and subsequent exploration, expenditures are capitalized. Determination as to reserve potential is based on the results of studies, which indicate whether production from a property is economically feasible. Upon commencement of commercial production of a development project these costs are amortized using the unit-of-production method over the proven and probable reserves. Capitalized exploration costs, net of salvage values, relating to a property that is later abandoned or considered uneconomic for the foreseeable future, are written off in the period the decision is made. No amortization is provided in respect of mine development expenditures until commencement of commercial production. Any production revenue earned prior to commercial production, net of related costs, is offset against the development costs.

Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment, and are recognized within mining operating expenses.

(b) Subsequent costs

The cost of replacing a part of an item of property, plant and equipment is recognized at the carrying amount of the item if it is probable that the future economic benefits embodied within the item will flow to the Company and its cost can be measured reliably. The carrying amount of the replaced part is derecognized. The costs of the day-to-day servicing of property, plant and equipment are recognized in profit or loss as incurred.

(c) Depreciation and amortization

Mining interests relating to plant and equipment, mining leases and claims, royalty interests, and other development costs are recorded at cost with depreciation and amortization provided on the unit-of-production method over the estimated remaining ounces of palladium to be produced based on the proven and probable reserves or, in the event that the company is mining resources, an appropriate estimate of the resources mined or expected to be mined.

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Mining interests relating to small vehicles and certain machinery with a determinable expected life are recorded at cost with depreciation provided on a straight-line basis over their estimated useful lives, ranging from three to seven years, which most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. Straight-line depreciation is calculated over the depreciable amount, which is the cost of an asset, less its residual value.

Significant components of individual assets are assessed and, if a component has a useful life that is different from the remainder of that asset, that component is depreciated separately using the unit-of-production or straight-line method as appropriate. Costs relating to land are not amortized.

Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Company will obtain ownership by the end of the lease term.

Depreciation methods, useful lives and residual values are reviewed at each financial year-end and adjusted if appropriate.

Discontinued operations and assets held for sale

A non-current asset (or disposal group) is reclassified as held for sale and reclassified to current assets if the Company expects that its carrying value will be recovered principally through a sale transaction and not through its continued use provided that the asset (or disposal group) is available for immediate sale in its present condition and realization of its sale is highly probable. A high probability of sale is considered to exist when the Company is committed to a plan to sell the asset (or disposal group), has undertaken an active program to actively market the asset (or disposal group) and locate a buyer at a price reasonable in relation to fair value of the asset (or disposal group), and expects the sale process to be concluded within one year following the date of reclassification. The assets and liabilities of any subsidiary for which the Company is committed to sell and for which loss of control of the subsidiary is expected to occur are also reclassified as held for sale.

Any component of the Company which, while in use, represented one or more cash-generating units (“CGUs”) of the Company, has been disposed of or classified as held for sale, and represents a major line of business or geographical area of operations or is part of a single plan to dispose of such a business or operation or is otherwise a subsidiary acquired exclusively for resale is classified as a discontinued operation. The assets, liabilities, comprehensive income, and cash flows relating to a discontinued operation of the Company are segregated and reported separately from the continuing operations of the Company in the period of reclassification without restatement or re-presentation of comparative periods prior to the reporting period in which the reclassification occurs.

Impairment

The carrying amounts of the Company’s non-financial assets, excluding inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. Impairment is assessed at the level of CGUs. An impairment loss is recognized in the Consolidated Statements of Operations and Comprehensive Loss for any excess of carrying amount over the recoverable amount.

Impairment is determined for an individual asset unless the asset does not generate cash inflows that are independent of those generated from other assets or groups of assets, in which case, the individual assets are grouped together into CGUs for impairment purposes.

The recoverable amount of an asset or CGU is the greater of its “value in use”, defined as the discounted present value of the future cash flows expected to arise from its continuing use and its ultimate disposal, and its “fair value less costs to sell”, defined as the best estimate of the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date, less costs of disposal. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

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An impairment loss is recognized in the Consolidated Statements of Operations and Comprehensive Loss if the carrying amount of an asset or a CGU exceeds its estimated recoverable amount.

Impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss on non-financial assets other than goodwill is reversed if there has been a change in the estimates used to determine the recoverable amount, only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of amortization, if no impairment loss had been recognized.

Mining Interests - Open Pit Mining Costs

In open pit mining operations, it is necessary to remove overburden and other waste materials to access ore from which minerals can be extracted economically. The process of mining overburden and waste materials is referred to as stripping. Stripping costs generate a future economic benefit by providing (i) access to ore to be mined in the future; (ii) increases the fair value of the mine (or pit) as access to future mineral reserves becomes less costly; and (iii) increases the productive capacity or extends the productive life of the mine (or pit). For production phase stripping costs that are expected to generate a future economic benefit, the current period stripping costs are capitalized as open pit mine development costs.

Stripping costs incurred during the production stage of a pit are accounted for as costs of the inventory produced during the period that the stripping costs were incurred, unless these costs are expected to provide a future economic benefit.

Capitalized open pit mine development costs are depreciated once the open pit has entered production and the future economic benefit is being derived. Capitalized open pit mine development costs are depreciated using the unit of production method over the life of the ore body to which accessibility has been improved by the stripping activity.

Employee benefits

Defined contribution plans

A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension plans are recognized as an employee benefit expense in profit or loss in the periods during which services are rendered by employees. Prepaid contributions are recognized as an asset to the extent that a cash refund or a reduction in future payments is available. Contributions to a defined contribution plan that are due more than 12 months after the end of the period in which the employees render the service are discounted to their present value.

Compensation Agreements

Share-based payment transactions

The grant date fair value of equity-classified share-based payment awards granted to employees is recognized as an employee expense, with a corresponding increase in equity, over the period that the employees unconditionally become entitled to the awards. The amount recognized as an expense is adjusted to reflect the number of awards for which the related service are expected to be met, such that the amount ultimately recognized as an expense is based on the number of awards that do meet the related service and non-market performance conditions at the vesting date.

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The Company has a Restricted Share Unit (“RSU”) 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 is equivalent in value to the fair market value of a common share of the Company on the date of the award and a corresponding liability is established on the balance sheet. The value of each award is charged to compensation expense over the period of vesting. At each reporting date, the compensation expense and liability are adjusted to reflect the changes in market value of the liability based on the fair values of RSU’s for each vesting period determined using the Black-Scholes model.

Share-based payment arrangements in which the Company receives goods or services as consideration for its own equity instruments are accounted for as equity-settled share-based payment transactions, regardless of how the equity instruments are obtained by the Company.

Provisions

A provision is recognized if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability.

(a) Asset Retirement Obligations

In accordance with Company policies, asset retirement obligations (“ARO”) relating to legal and constructive obligations for future site reclamation and closure of the Company’s mine sites are recognized when incurred and a liability and corresponding asset are recorded at management’s best estimate. Estimated closure and restoration costs are provided for in the accounting period when the obligation arising from the related disturbance occurs.

The amount of any liability recognized is estimated based on the risk-adjusted costs required to settle present obligations, discounted using a pre-tax risk-free discount rate consistent with the time period of expected cash flows. When the liability is initially recorded, a corresponding asset retirement cost is recognized as an addition to mining interests and amortized using the unit of production method.

The liability for each mine site is accreted over time and the accretion charges are recognized as an interest cost in the Consolidated Statements of Operations and Comprehensive Loss. The liability is subject to re-measurement at each reporting date based on changes in discount rates and timing or amounts of the costs to be incurred. Changes in the liability, other than accretion charges, relating to mine rehabilitation and restoration obligations, which are not the result of current production of inventory, are added to or deducted from the carrying value of the related asset retirement cost in the reporting period recognized. If the change results in a reduction of the obligation in excess of the carrying value of the related asset retirement cost, the excess balance is recognized as a recovery through profit or loss in the period.

(b) Production Obligations

A provision for an obligation based on achieving specific production targets is recognized when the Company, based on estimates of recoverable minerals and planned production in the current mine plan for each property, determines the production target expected to be achieved.

Revenue and Accounts Receivable

Revenue from the sale of metals in the course of ordinary activities is measured at the fair value of the consideration received or receivable, net of volume adjustments. Revenue is recognized when persuasive evidence exists, usually in the form of an executed sales agreement, that the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, there is no continuing management involvement with the goods, and the amount of revenue can be measured reliably. The timing of the transfers of risks and rewards varies depending on the individual terms of the contract of sale.

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Revenue from the sale of palladium and by-product metals from the LDI mine is provisionally recognized based on quoted market prices upon the delivery of concentrate to the smelter or designated shipping point, which is when title transfers and significant rights and obligations of ownership pass. The Company’s smelter contracts provide for final prices to be determined by quoted market prices in a period subsequent to the date of concentrate delivery. Variations from the provisionally priced sales are recognized as revenue adjustments until final pricing is determined. Accounts receivable is recorded net of estimated treatment and refining costs which are subject to final assay adjustments. Subsequent adjustments to provisional pricing amounts due to changes in metal prices and foreign exchange are included in revenues on the Consolidated Statements of Operations and Comprehensive Loss and disclosed in the notes to the consolidated financial statements.

Interest expense and other costs and other income

Interest expense and other costs are comprised of interest expense on borrowings, accretion expense, unwinding of the discount on provisions, changes in the fair value of financial assets at fair value through profit or loss, impairment losses recognized on financial assets, losses on hedging instruments that are recognized in profit or loss, and changes in the fair value of the palladium warrants. Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognized in profit or loss using the effective interest method.

Other income is comprised of interest income on funds invested (including available-for-sale financial assets), gains on the disposal of available-for-sale financial assets, gains on the renouncement of flow-through expenditures, changes in the fair value of financial assets at fair value through profit or loss, and gains on hedging instruments that are recognized in profit or loss. Interest income is recognized as it accrues in profit or loss, using the effective interest method.

Foreign currency gains and losses are reported on a net basis.

Income and mining taxes

Income tax expense is comprised of current and deferred tax. Current tax and deferred tax are recognized in profit or loss except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income.

Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.

Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for the following temporary differences:

(i) the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss;

(ii) temporary differences relating to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future; and

(iii) temporary differences arising on the initial recognition of goodwill.

Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date.

Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income or mining taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously.

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A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.

Basic and Diluted Earnings (Loss) Per Share

Basic earnings (loss) per common share (“EPS”) is computed by dividing the income (loss) for the period by the weighted average number of common shares outstanding during the reporting period.

Diluted EPS is computed using the treasury stock method whereby the weighted average number of shares outstanding is increased to include additional common shares from the assumed exercise of stock options, convertible debentures, palladium warrants and common share purchase warrants, if dilutive. The number of additional common shares is calculated by assuming that outstanding equity instruments were exercised and that proceeds from such exercises were used to acquire shares of common stock at the average market price during the reporting period. These common equivalent shares are not included in the calculation of the weighted average number of shares outstanding for diluted loss per common share when the effect would be anti-dilutive.

For convertible financial instruments classified as debt, the consolidated comprehensive net income (loss) is adjusted to reflect the profit or loss which would have been reported in the period if the debt instrument had been converted immediately at the beginning of the period. These adjustments to profit or loss and the equivalent shares realizable on conversion are not included in the diluted earnings per share calculation when the effect would be anti-dilutive.

Flow-Through Shares

The Company finances a portion of its exploration activities through the issuance of flow-through shares. On the date of issuance of the flow-through shares, the premium relating to the proceeds received in excess of the closing market price of the Company’s common shares is allocated to liabilities.

Under the terms of the flow-through common share issues, the tax attributes of the related expenditures are renounced to investors and deferred income tax expense and deferred tax liabilities are increased by the estimated income tax benefits renounced by the Company to the investors. The premium liability is reduced pro-rata based on the actual amount of flow-through eligible expenditures incurred during the reporting period. The reduction to the premium is recognized through profit or loss as other income.

Segment Reporting

An operating segment is a component of the Company that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Company’s other components. An operating segment’s operating results are reviewed regularly by the Company’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available.

Following the sale of its discontinued gold operations on March 22, 2013 (see note 4), the Company has one reportable segment.

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Adoption of New Accounting Standards

The following new accounting standards have been adopted by the Company.

IAS 32 Financial Instruments: Presentation

This standard is amended to clarify requirements for offsetting of financial assets and financial liabilities. The amendment is effective for annual periods beginning on or after January 1, 2014. This amendment did not have a material impact on the consolidated financial statements of the Company.

IAS 36 Recoverable Amounts

This standard was amended in May 2013 to change the disclosure required when an impairment loss is recognized or reversed. The amendments require the disclosure of the recoverable amount of an asset or cash generating unit at the time an impairment loss has been recognized or reversed and detailed disclosure of how the associated fair value less costs of disposal has been determined. The amendments are effective for annual periods beginning on or after January 1, 2014 with earlier adoption permitted. This amendment did not have a material impact on the consolidated financial statements of the Company.

IFRIC 21 Accounting for Levies Imposed by Governments

This interpretation provides guidance on the obligating event giving rise to a liability in connection with a levy imposed by a government, and clarifies that the obligating event is the activity that triggers the payment of the levy as identified by the legislation. The interpretation is effective for annual periods beginning on or after January 1, 2014. This amendment did not have a material impact on the consolidated financial statements of the Company.

New standards and interpretations not yet adopted

The following new standards, amendments to standards and interpretations are not yet effective for the year ended December 31, 2014 or have otherwise not yet been adopted by the Company. The Company is evaluating the impact, if any; adoption of the standards will have on the disclosures in the Company’s consolidated financial statements:

IAS 16 and IAS 38 Clarification of acceptable methods of depreciation and amortization

This pronouncement amends IAS 16 Property Plant and Equipment and IAS 38 Intangible Assets to (i) clarify that the use of a revenue-based depreciation method is not appropriate for property, plant and equipment, and (ii) provide a rebuttable presumption for intangible assets. The amendment is effective for years beginning on or after January 1, 2016. This amendment is not expected to have a material impact on the consolidated financial statements of the Company.

IFRS 15 Revenue from contracts with customers

This new standard on revenue recognition supercedes IAS 18 Revenue, IAS 11 Construction Contracts, and related interpretations. The amendment is effective for years beginning on or after January 1, 2017. The Company is presently evaluating the potential impact of this new standard on the consolidated financial statements of the Company.

IFRS 9 Financial Instruments: Classification and Measurement

On July 24, 2014 the IASB issued the complete IFRS 9 (IFRS 9 (2014)) which will replace IAS 39, Financial Instruments: Recognition and Measurement. In November 2009 the IASB issued the first version of IFRS 9, Financial Instruments (IFRS 9 (2009)) and subsequently issued various amendments in October 2010, (IFRS 9 Financial Instruments (2010)) and November 2013 (IFRS 9 Financial Instruments (2013)).

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IFRS 9 (2009) introduces new requirements for the classification and measurement of financial assets. Under IFRS 9 (2009), financial assets are classified and measured based on the business model in which they are held and the characteristics of their contractual cash flows. This includes the introduction of a third measurement category for financial assets – fair value through other comprehensive income.

IFRS 9 (2010) introduces additional changes relating to financial liabilities.

IFRS 9 (2013) includes a new general hedge accounting standard which will align hedge accounting more closely with risk management. This new standard does not fundamentally change the types of hedging relationships or the requirement to measure and recognize ineffectiveness, however it will provide more hedging strategies that are used for risk management to qualify for hedge accounting and introduce more judgment to assess the effectiveness of a hedging relationship.

Special transitional requirements have been set for the application of the new general hedging model.

IFRS 9 (2014) includes finalized guidance on the classification and measurement of financial assets. The final standard also amends the impairment model by introducing a new ‘expected credit loss’ model for calculating impairment, and new general hedge accounting requirements.

The mandatory effective date of IFRS 9 is for annual periods beginning on or after January 1, 2018 and must be applied retrospectively with some exemptions. Early adoption is permitted. The restatement of prior periods is not required and is only permitted if information is available without the use of hindsight. The Company is presently evaluating the impact of adopting this standard and does not intend to early adopt IFRS 9 (2009), IFRS 9 (2010) or IFRS 9 (2013) and/or IFRS 9 (2014) in its financial statements for the annual period beginning on January 1, 2015.

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4. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE

On March 22, 2013, the Company divested of its interest in its gold division through the disposal of all of the shares of its wholly-owned subsidiary, NAP Quebec. As a result, the Company has presented the consolidated financial statements to segregate the gold division as discontinued operations and related financial assets and liabilities held for sale from those balances relating to the Company’s continuing operations for the period to March 22, 2013.

Assets and liabilities held for sale

The carrying values of the major classes of assets and liabilities included as part of NAP Quebec on the consolidated balance sheet were reclassified as assets and liabilities of a disposal group classified as held for sale. As at the disposal date of March 22, 2013, the balances reported consisted of the following:

	At March 22 2013
Assets of a disposal group classified as held for sale
Cash and cash equivalents	$	1.1
Taxes receivable		5.0
Inventories		4.0
Other current assets		1.7
Mining Interests		20.6
	$	32.4
Liabilities of a disposal group classified as held for sale
Accounts payable and accrued liabilities	$	7.0
Obligations under finance leases		0.3
Asset retirement obligation		6.2
	$	13.5
Proceeds on disposal, net
Cash	$	18.0
Equity-settled1		1.4
Receivable inventory amounts		1.8
Transaction costs related to sale		(0.8	)
	$	20.4
Gain on disposal of gold division	$	1.5

¹  The purchaser, Maudore Minerals Ltd. issued 1.5 million of its common shares (“MAO” on the TSXV) as consideration towards the purchase price.

In addition to the recognized proceeds, the sale agreement also includes a provision for future settlement of amounts relating to a portion of the gold contained in the liners at the Sleeping Giant mill. The valuation of the settlement amount was contingent upon future determination of gold content, pricing, and foreign exchange at the time of changing the liners. In June of 2014 the Company entered into a settlement agreement with Maudore in respect of all amounts owing to the Company by Maudore. In September of 2014, Maudore filed a Notice of Intention to make a proposal under the Bankruptcy and Insolvency Act (Canada). Maudore has until February 27, 2015 to complete and present its proposal to its creditors. As a result, neither the contingent asset nor any estimate of income related to this contract provision has been reflected in the consolidated financial statements.

On May 22, 2013, in accordance with contractual terms, the Company elected to issue 203,800 common shares for the settlement of $0.3 of transaction costs related to the sale of the gold division.

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Net loss from discontinued operations

Loss and comprehensive loss related to NAP Quebec have been segregated from continuing operations. Loss from discontinued operations consists of the following:

	2013
Revenue	$	0.2
Mining operating expenses
Production cost recovery		(0.3	)
Total mining operating expenses		(0.3	)
Income from mining operations		0.5
Other expenses
Exploration		0.2
General and administration		(0.1	)
Total other expenses		0.1
Income before taxes		0.4
Income and mining tax recovery		0.6
Income and comprehensive income for the period before disposal		1.0
Gain on disposal of gold division		1.5
Income and comprehensive income for the year	$	2.5

Cash flows from discontinued operations

Cash flows related to NAP Quebec have been segregated from continuing operations. Net cash flows provided by (used in) discontinued operations consist of the following:

	2013
Cash flow provided by:
Operations	$	6.1
Financing		0.3
Investing		14.2
Net cash provided by discontinued operations	$	20.6
Opening cash held by discontinued operations		0.6
Closing cash held by discontinued operations		(1.1	)
Net change in cash attributable to discontinued operations	$	20.1

5. ACCOUNTS RECEIVABLE

Accounts receivable consist of the following:

	At December 31 2014		At December 31 2013
Accounts receivable	$	75.2	$	38.4
Unrealized gain on financial contracts1		0.2		0.2
Accounts receivable	$	75.4	$	38.6

¹  As at December 31, 2014, a total of 12,800 ounces of past palladium production delivered and sold to a smelter, was priced using forward prices for the month of final settlement at an average price of $942 per ounce of palladium (December 31, 2013 – 31,000 ounces of past palladium production at an average price of $768 per ounce). Refer to note 15.

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Accounts receivable represents the value of all platinum group metals (“PGMs”), gold and certain base metals contained in LDI’s concentrate shipped for smelting and refining, using the December 31, 2014 forward metal prices and foreign exchange rates applicable for the month of final settlement, and for which significant risks and rewards have transferred to third parties.

All of the accounts receivable are due from two customers at December 31, 2014 (December 31, 2013 – two customers). A reserve for doubtful accounts has not been established, as in the opinion of management, the amount due will be fully collected. The Company is not economically dependent on its customers, refer to note 18.

First priority security of accounts receivable, supplies inventory, and inventories of concentrate, crushed and broken ore and second priority security on the fixed assets have been pledged as security against a credit facility described in note 10.

6. INVENTORIES

Inventories consist of the following:

	At December 31 2014		At December 31 2013
Supplies1	$	11.3	$	10.3
Concentrate inventory1		3.1		2.1
Crushed and broken ore stockpiles1,2		0.5		1.8
Total	$	14.9	$	14.2

¹  This portion of inventories has been pledged as security on the Company’s credit facility. Refer to note 10.

²  Crushed and broken ore stockpiles represent coarse ore that has been extracted from the mine and is available for further processing.

During the year-ended December 31, 2013, concentrate inventory and crushed and broken ore stockpile inventories were written down in the amount of $0.6 and $0.1 respectively to reflect net realizable value (2014 - $nil). The aggregate write-down of $0.7 has been recorded as an inventory pricing adjustment at December 31, 2013.

Supplies inventory of $40.3 were recognized as an expense during the year ended December 31, 2014 (2013 - $27.2). During the year ended December 31, 2014 the Company recognized a write-down of obsolete supplies inventory in the amount of $0.8 (2013 - $nil).

7. OTHER ASSETS

Other assets consist of the following:

	At December 31 2014		At December 31 2013
Prepaids	$	2.0	$	1.5
HST receivable		0.8		4.4
Other receivables		0.8		0.9
Other		—		0.2
	$	3.6	$	7.0

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8. MINING INTERESTS

Mining interests are comprised of the following:

	Plant and equipment			Underground mine development1			Equipment under finance lease			Mining leases and claims, royalty interest, and development		Total
Cost or deemed cost
Balance at January 1, 2013	$	48.6		$	299.2		$	19.5		$	14.8	$	382.1
Additions of physical assets		21.8			91.4			2.8			—		116.0
Revaluation of ARO assets		(1.9	)		—			—			—		(1.9	)
Capitalization of borrowing costs		—			28.6			—			—		28.6
Reclassification of costs for finance leases maturing in the year		6.2			(3.3	)		(2.9	)		—		—
Disposals		(0.9	)		—			(3.8	)		—		(4.7	)
Balance at December 31, 2013	$	73.8		$	415.9		$	15.6		$	14.8	$	520.1
Additions of physical assets		13.1			12.2			8.0			1.1		34.4
Revaluation of ARO assets		1.8			—			—			—		1.8
Reclassification of costs for finance leases maturing in the year		0.5			(1.7	)		1.2			—		—
Disposals		(2.1	)		(0.7	)		(0.1	)		—		(2.9	)
Balance at December 31, 2014	$	87.1		$	425.7		$	24.7		$	15.9	$	553.4
Depreciation and impairment losses
Balance at January 1, 2013	$	11.3		$	20.3		$	4.0		$	3.0	$	38.6
Depreciation for the year		5.1			17.7			1.9			1.0		25.7
Reclassification for finance leases maturing in the year		1.3			0.1			(1.4	)		—		—
Disposals		(0.1	)		—			(0.3	)		—		(0.4	)
Balance at December 31, 2013	$	17.6		$	38.1		$	4.2		$	4.0	$	63.9
Depreciation for the year		5.3			29.3			2.3			0.8		37.7
Reclassification for finance leases maturing in the year		0.3			—			(0.3	)		—		—
Other reclassifications		(0.2	)		0.1			0.1			—		—
Disposals		(0.2	)		(0.6	)		(0.2	)		—		(1.0	)
Balance at December 31, 2014		22.8			66.9			6.1			4.8		100.6
Carrying amounts
As at December 31, 2013	$	56.2		$	377.8		$	11.4		$	10.8	$	456.2
As at December 31, 2014	$	64.3		$	358.8		$	18.6		$	11.1	$	452.8

¹  During the Offset zone mine expansion, all interest costs on debt used to finance the project were capitalized to mining interests. For the year ended December 31, 2013, the $28.6 capitalized borrowing costs was comprised of $19.6 interest costs on long-term debt and $9.0 related to the Company’s revision of its estimated timing of cash flows related to the senior secured term loan.

Asset restrictions and contractual commitments

The Company’s assets are subject to certain restrictions on title and property, plant and equipment. Substantially all assets are pledged as security for credit agreement arrangements and senior secured lenders. See notes 5, 10, 12 and 17.

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9. ASSET RETIREMENT OBLIGATIONS AND RECLAMATION DEPOSITS

At December 31, 2014, the changes in asset retirement obligations are as follows:

Asset retirement obligations, beginning of year	$	13.6
Change in discount rate and estimated closure costs (note 8)		1.8
Accretion expense		0.4
Asset retirement obligations, end of year	$	15.8

Asset retirement obligations comprised the following as at December 31, 2014:

Property	Expected timing of cash flows		Asset retirement obligation		Mine closure plan requirement		Letter of credit outstanding		Undiscounted asset retirement obligation
LDI mine1		2023	$	15.8	$	14.1	$	14.1	$	18.4

¹  Including a letter of credit for Shebandowan West project, the total letters of credit outstanding are $14.4 for asset retirement obligations. Refer to notes 10 and 17.

Asset retirement obligations comprised the following as at December 31, 2013:

Property	Expected timing of cash flows		Asset retirement obligation		Mine closure plan requirement		Letter of credit outstanding		Undiscounted asset retirement obligation
LDI mine1		2023	$	13.6	$	14.1	$	14.1	$	18.9

¹  Including a letter of credit for Shebandowan West project, the total letters of credit outstanding are $14.4 for asset retirement obligations. Refer to notes 10 and 17.

The key assumptions applied for determination of the ARO obligation are as follows as at:

	At December 31 2014			At December 31 2013
Inflation		2.00	%		2.00	%
Market risk		5.00	%		5.00	%
Discount rate		1.67	%		2.75	%

The asset retirement obligation may change materially based on future changes in operations, costs of reclamation and closure activities, and regulatory requirements. The mine closure obligation was revised at December 31, 2013 to reflect the Company’s most current closure cost estimates.

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10. CREDIT FACILITY

The Company has secured a credit facility with a Canadian chartered bank, which matures July 3, 2015, and which is to be used for working capital liquidity and general corporate purposes. The maximum that can be utilized under the facility is the lesser of US$60 and an amount determined by a borrowing base calculation. The credit facility contains certain financial covenants, as defined in the agreement, including senior debt to earnings before interest, taxes, depreciation and amortization ratios, which are effective in the fourth quarter of 2014, and adjusted current ratio requirements, minimum tangible net worth requirements and capital expenditure limits which became effective June 7, 2013 which, if not met, would result in an event of default. The loan also includes certain other covenants, including material adverse change provisions and cross-default provisions with the senior secured term loan (note 12). Certain events of default result in the credit facility becoming immediately due, while other events of default entitle the lender to demand repayment. As of December 31, 2014, the company was in compliance with the covenants.

Under the credit facility, as of December 31, 2014, the Company utilized $15.4 (US$13.3) for letters of credit, primarily for reclamation deposits (2013 - $15.4 (US$14.5)), and had $36.8 (US$31.7) in borrowings outstanding (2013 - $17.8 (US$16.8)).

First priority security of accounts receivable, supplies inventory, and inventories of concentrate, crushed and broken ore and second priority security on the property, plant and equipment have been pledged as security against the credit facility. Refer to note 5.

11. LEASES

At the respective reporting dates, the Company was party to the following lease arrangements:

FINANCE LEASES (OBLIGATIONS UNDER FINANCE LEASES)

The Company leases production equipment under a number of finance lease agreements. Some leases provide the Company with the option to purchase the equipment at a beneficial price. The leased equipment secures the lease obligations. The net carrying amount of leased equipment at each reporting date is summarized in the mining interests under the category of equipment under finance lease. Refer to note 8.

The following is a schedule of future minimum lease payments under finance leases together with the present value of the net minimum lease payments at each reporting date:

	At December 31, 2014						At December 31, 2013
	Future minimum lease payments		Interest		Present value of minimum lease payments		Future minimum lease payments		Interest		Present value of minimum lease payments
Less than one year	$	5.5	$	0.9	$	4.6	$	3.6	$	0.6	$	3.0
Between one and five years		15.3		1.1		14.2		9.3		0.6		8.7
	$	20.8	$	2.0	$	18.8	$	12.9	$	1.2	$	11.7
Less current portion						4.6						3.0
					$	14.2					$	8.7

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OPERATING LEASES

The Company, from time to time, enters into leasing arrangements for production and other equipment under a number of operating leases. These leases are generally short-term in nature and subject to cancellation clauses. The Company periodically reviews the nature of these leases to identify if there have been any significant changes to the terms and use of the items under operating lease which would require reclassification as a finance lease. Any required reclassification is applied prospectively from the date the revised lease terms become effective.

The following schedule provides the future minimum lease payments under non-cancellable operating leases outstanding at each of the reporting dates:

	At December 31 2014		At December 31 2013
Less than one year	$	1.4	$	1.9
Between one and five years		1.4		2.5
	$	2.8	$	4.4

The total minimum lease payments recognized in expense during each of the stated years are as follows:

	December 31 2014		December 31 2013
Minimum lease payments expensed	$	3.8	$	2.5

12. LONG-TERM DEBT

Long-term debt is comprised of the following as at each reporting date:

	At December 31 2014		At December 31 2013
Senior secured term loan	$	186.4	$	173.7
Convertible debentures (2012)		37.5		35.9
Convertible debentures and warrants (2014 – Tranche 1)		0.8		—
Convertible debentures and warrants (2014 – Tranche 2)		1.4		—
		226.1		209.6
Less current portion1		7.3		173.7
	$	218.8	$	35.9

¹  Subsequent to December 31, 2013, following receipt of waivers from the Company’s senior secured term lender for covenant violations, the current portion was reclassified as non-current.

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Senior secured term loan

On June 7, 2013, the Company closed a US$130 senior secured term loan financing with Brookfield Capital Partners Ltd. (“Brookfield”) which bears interest at 15% per annum and is due June 7, 2017. The loan is secured by first priority security on the property, plant and equipment and second priority security on accounts receivable and inventory. The Company has the option to accrue interest during the first two years of the loan; in which case, the interest rate on the loan and accrued interest would increase by 4%.

At closing, the Company exercised an option to defer a commitment fee of US$3.9 for a period of up to two years. As a result, the balance of the commitment fee was added to the principal outstanding with interest on the outstanding fee compounding monthly until repaid.

In addition to the term loan and the commitment fee included in the principal, the loan agreement also included a provision for the payment of an exit fee equal to 5% of term loan principal settlements at the time of repayment.

On November 29, 2013, the Company amended its senior secured term, resulting in an additional advance of US$21.4 of cash. The cash received consisted of an additional US$15.0 added to the existing facility and a refund of US$6.4 of cash interest previously paid to Brookfield.

Pursuant to the 2013 amendment, the interest rate was recalculated as if the Company had elected to accrue interest on the loan from the date of the original closing on June 7, 2013, resulting in a 4% increase of the interest rate from 15% to 19% until a voluntary reversion to cash interest payments by the Company. The amendment provided that after a voluntary reversion to cash interest payments, and upon payment of interest and fees which have been deferred, the interest rate returns to 15% per annum on the principal amount outstanding. The exit fee contained in the original loan agreement was replaced by an amendment fee and all interest accrued up to and including June 30, 2014 was capitalized to the principal amount along with the amendment and commitment fees. Prepayment of any principal (including capitalized interest and fees) is subject to a prepayment fee and voluntary prepayment conditions.

The 2013 amendment resulted in an increase of the US$133.9 principal of the loan at November 29, 2013 for capitalized interest of US$12.7, an additional loan of US$15.0, and an amendment fee of US$8.1 for a total revised principal of US$169.7.

The loan is measured at amortized cost. Interest on the loan was originally recorded at an effective interest rate of 16.7%. As a result of the 2013 amendment to the term loan agreement, the amended effective interest rate was adjusted to 18.00%.

At December 31, 2013, the Company was in violation of certain covenants which entitled the lender to demand accelerated repayment, and for which a waiver was not obtained from the lender until subsequent to the year-end reporting date. In the fourth quarter of 2013, a construction lien was placed on the LDI mine by a supplier. The Company paid the supplier the amount owed at the time and the lien was removed. However, this resulted in an event of default as at December 31, 2013 under the secured term loan and, as a result of a cross-default, an event of default under the credit facility, and accordingly each lender had the ability to accelerate its loans. The event of default resulted in classification of the secured term loan to current liabilities for year-end reporting purposes which further triggered a violation of a current ratio covenant of its credit facility. No waivers were obtained related to these events of default as at December 31, 2013. As a result the full balance of the loan was reclassified as a current liability as at December 31, 2013.

On January 28, 2014, the Company obtained a waiver from the lender regarding the secured term loan covenant violation, and the event of default has been cured.

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Effective June 30, 2014, the loan was further amended to reduce the interest rate to 15% effective July 1, 2014. As part of the 2014 amendment, a payment of US$23.4, consisting of US$16.2 previously accrued interest and US$7.2 of associated pre-payment fees, was made on July 3, 2014, and accrued and unpaid interest of US$16.2 was capitalized to the loan principal amount. As a result of this amendment to the term loan agreement, the amended effective interest rate was adjusted to 18.74%. As at December 31, 2014, the carrying amount for the senior secured term loan was $186.4 (US$160.6).

The loan contains covenants, as defined in the agreement, including senior debt to earnings before interest, taxes, depreciation and amortization ratios, which are effective in the fourth quarter of 2014, and minimum tangible net worth requirements and capital expenditure limits which became effective June 7, 2013 which, if not met, would result in an event of default. The loan also includes certain events of default including breaches of the financial covenants, material adverse changes, limits on liens, additional debt, payments and cross-default provisions. Certain events of default result in the loan becoming immediately due, together with the prepayment fee and penalty interest of 5% above the applicable rate while unpaid, and other events of default entitle the lender to demand repayment of the loan together with the prepayment fee and penalty interest. At December 31, 2014, the Company was in compliance with all covenants.

Senior secured notes

During the fourth quarter of 2011, the Company issued $72.0 of senior secured notes by way of a private placement for net proceeds of $69.6. The notes, which were due to mature on October 4, 2014, with a one year extension at the option of the Company, were issued in $1,000 denominations and bore interest at a rate of 9.25% per year, payable semi-annually, with 1 palladium warrant attached for each $1,000 note, with an October 4, 2014 expiration date. The debt was carried at amortized cost using an effective interest rate of 13% for accounting purposes.

On June 7, 2013, the debt component of the senior secured notes was fully repaid using the proceeds from the senior secured term loan. The total payment amounted to $80.5 and included settlement of the principal outstanding of $72.0, accrued interest of $1.3, and a redemption premium of $7.2. The repayment resulted in the recognition of a loss on extinguishment of $11.0.

The palladium warrants originally issued with the senior secured notes were not settled. A total of 72,000 warrants were issued which entitled the holders to purchase 0.35 ounces of palladium at a purchase price of US$620 per ounce (the “Strike Price”), anytime up to October 4, 2014. If exercised, the Company was to pay the warrant holder an amount equal to the average of the U.S dollar palladium afternoon fixing price per ounce on the London Platinum and Palladium Market for the ten trading days prior to the exercise date less the Strike Price, multiplied by 0.35. The Company had the option, subject to certain conditions, to pay the amount owing in common shares priced at a 7% discount to the volume weighted average price on the Toronto Stock Exchange for the five trading days prior to the date of exercise.

During June 2013, a total of 13,000 palladium warrants were exercised, resulting in a settlement payable of $0.6. The Company elected to apply the equity-settlement option, resulting in the issuance of 574,738 common shares. In July 2013, an additional 47,000 palladium warrants were exercised resulting in a $1.7 cash settlement.

On September 30, 2014 and October 1, 2014, the Company received confirmation of exercise of the remaining 12,000 warrants. On October 22, 2014 and October 23, 2014, the Company finalized the cash-settlement of the related obligations in the amount of $1.1.

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The derivatives relating to the outstanding palladium warrants were recorded at fair value through profit or loss at each reporting date. At December 31, 2014, all palladium warrants had been fully exercised and settled (December 31, 2013 – 12,000 palladium warrants were outstanding). At December 31, 2013, the palladium warrants were valued using a binomial model which included the following key assumptions:

	At December 31 2013
Market price of palladium	$	711
Strike price	$	620
Volatility1		21	%
Risk free rate		1.13	%
Expected life (in years)		0.76

¹ Expected volatility is estimated by considering historic average palladium price volatility based on the remaining life of the warrants.

The value of the derivative liability was $nil at December 31, 2014 ($0.5 at December 31, 2013).

Convertible Debentures (2012)

On July 31, 2012, the Company completed an offering of 43,000 convertible unsecured subordinated debentures of the Company at a price of $1,000 per debenture, for total gross proceeds of $43.0 ($40.8 net proceeds). The debentures mature on September 30, 2017 and bear interest at a rate of 6.15% per year, payable semi-annually. At the option of the holder, the debentures may be converted into common shares of the Company at any time prior to maturity at a conversion price of $2.90 per common share.

The convertible debentures are compound financial instruments, consisting of the debt instrument and the equity conversion feature. The debt instrument was valued at amortized cost using the effective interest rate method at a discount rate of 10.5%. The excess of the proceeds of $43.0 over the value assigned to the debt instrument was allocated as the fair value of the equity component of the convertible debentures. Transaction costs were netted against the debt instrument and equity component based on the pro-rata allocation of the fair value of each instrument at initial recognition.

Of the net proceeds of $40.8, $33.9 has been allocated to long-term debt, and the remaining portion of $6.9 has been allocated to the equity component of the convertible debentures at the time of issuance.

Convertible Debentures (2014 – Tranche 1)

On January 31, 2014 and February 10, 2014, the Company closed a public offering with the aggregate sale of $32.0 gross principal amount of convertible unsecured subordinated debentures (the “2014 Tranche 1 Debentures”) of the Company at a price of $1,000 per Debenture, including approximately 16.8 million common share purchase warrants (the “2014 Tranche 1 Warrants”). This offering represented the first tranche of the offering. Net proceeds received were $28.5. The conversion price of the 2014 Tranche 1 Debentures is $0.635 per common share, and the original exercise price of the 2014 Tranche 1 Warrants was $0.762 per common share. As a result of the completion of the second tranche offering, the anti-dilution clause within the 2014 Tranche 1 Debentures agreements resulted in an adjustment of the original exercise price for the 2014 Tranche 1 Warrants to $0.5786 per common share.

The 2014 Tranche 1 Debentures will mature on January 31, 2019, unless redeemed or converted earlier, or unless extended, and will bear interest at an annual rate of 7.5% payable semi-annually in arrears on January 31 and July 31 of each year. Holders may convert their 2014 Tranche 1 Debentures into common shares of the Company at any time at a conversion rate of approximately 1,575 Common Shares per $1,000 principal amount of 2014 Tranche 1 Debentures, representing 50.4 million common shares of the Company. Holders converting their debentures will receive all accrued and unpaid interest, as well as interest that would have been paid if the 2014 Tranche 1 Debentures were held through to maturity (the “Tranche 1 Make Whole Amount”). At the Company’s option, interest and Tranche 1 Make Whole Amounts can be paid in common shares.

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Each 2014 Tranche 1 Warrant entitles the holder thereof to purchase one common share of the Company at any time before March 28, 2017.

Due to the existence of multiple derivatives embedded within the contract, the Company has elected to account for the 2014 Tranche 1 Debentures and all related derivatives as one instrument at fair value through profit or loss, with changes in fair value being recognized as derivative gains or losses through profit or loss. The 2014 Tranche 1 Warrants are also accounted for at fair value through profit or loss. As a result of this election, transaction costs of $3.5 were expensed as financing costs for the year ended December 31, 2014.

The initial fair value of the 2014 Tranche 1 debt of $28.4 was determined based on the publicly traded market price of the 2014 Tranche 1 Debentures, while the fair value of the 2014 Tranche 1 Warrants approved on March 28, 2014 was assigned a value of $3.6 using the Black-Scholes model.

At December 31, 2014, 2014 Tranche 1 Debentures with an initial face value of $31.7, including accrued interest and make-whole provisions, had been converted into 76,407,816 common shares of NAP. Debentures with an initial face value of $0.3 were outstanding at December 31, 2014. All warrants issued were also outstanding at December 31, 2014. The fair value of the remaining debentures outstanding and the outstanding warrants as at December 31, 2014 is $0.4 based on the publicly traded market price and $0.5, respectively, and this amount is recorded in the statement of financial position in long term debt and current portion of long term debt. The changes in fair value from the transaction date to December 31, 2014 are included in interest and other income in the statement of comprehensive loss (refer to note 19).

The following assumptions were applied for the Black-Scholes valuations of the outstanding 2014 Tranche 1 Warrants at initial recognition and the current reporting date:

	December 31, 2014			January 31, 2014
Market price common shares of NAP (PDL)	$	0.16		$	0.53
Strike price	$	0.58		$	0.76
Volatility1		83	%		75	%
Risk free rate		1.02	%		1.14	%
Expected life (in years)		2.25			3.00

¹  Expected volatility is estimated by considering historic average daily price volatility of the common shares of the Company based on the remaining life of the warrants.

Convertible Debentures (2014 – Tranche 2)

On April 11, 2014 and April 17, 2014, the Company closed a public offering with the aggregate sale of $35.0 gross principal amount of convertible unsecured subordinated debentures (the “2014 Tranche 2 Debentures”) of the Company at a price of $1,000 per Debenture, including approximately 18.9 million common share purchase warrants (the “2014 Tranche 2 Warrants”). This offering represented the second tranche of the offering. Net proceeds received were $32.7. The conversion price of the 2014 Tranche 2 Debentures is $0.4629 per common share, and the exercise price of the 2014 Tranche 2 Warrants is $0.5786 per common share.

The 2014 Tranche 2 Debentures will mature on April 11, 2019, unless redeemed or converted earlier, or unless extended, and will bear interest at an annual rate of 7.5% payable semi-annually in arrears on March 31 and September 30 of each year. Holders may convert their 2014 Tranche 2 Debentures into common shares of NAP at any time at a conversion rate of approximately 2,160 Common Shares per $1,000 principal amount of Debentures. Holders converting their debentures will receive all accrued and unpaid interest, as well as interest that would have been paid if the 2014 Tranche

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2 Debentures were held through to maturity (the “Tranche 2 Make Whole Amount”). At the Company’s option, interest and Tranche 2 Make-Whole Amounts can be paid in common shares.

Each 2014 Tranche 2 Warrant will entitle the holders thereof to purchase one common share of the Company at any time before the second anniversary of the date of issue.

Due to the existence of multiple derivatives embedded within the contract, the Company has elected to account for the 2014 Tranche 2 Debentures and all related derivatives as one instrument at fair value through profit or loss, with future changes in fair value being recognized as derivative gains or losses through profit or loss. The 2014 Tranche 2 Warrants are also accounted for at fair value through profit or loss. As a result of this election, transaction costs of $2.3 were expensed in the period as financing costs for the year ended December 31, 2014.

The initial fair value of the 2014 Tranche 2 Debentures of $33.1 was determined using a FinCAD pricing model, while the value of the related 2014 Tranche 2 Warrants of $1.9 was calculated using the Black-Scholes model.

At December 31, 2014, 2014 Tranche 2 Debentures with an initial face value of $33.5, including accrued interest and make-whole provisions, had been converted into 108,972,404 common shares of NAP. Debentures with an initial face value of $1.5 were outstanding at December 31, 2014. All warrants issued were also outstanding at December 31, 2014. The fair value of the remaining debentures outstanding and the outstanding warrants as at December 31, 2014 is $1.0 and $0.4 using the Black-Scholes model, respectively, and these amounts are recorded in the statement of financial position in long term debt and current portion of long term debt, respectively. The changes in fair value from the transaction date to December 31, 2014 are included in interest and other income in the statement of comprehensive loss (refer to note 19).

The following assumptions were applied for the valuations of the outstanding 2014 Tranche 2 Debentures and Warrants at initial recognition and the current reporting date:

Debentures	April 11,
	2014
Market price common shares of NAP (PDL)	$	0.34
Strike price	$	0.46
Risk free rate		1.64	%
Expected life (in years)		5.00

Warrants	December 31,			April 11,
	2014			2014
Market price common shares of NAP (PDL)	$	0.16		$	0.34
Strike price	$	0.58		$	0.58
Volatility1		98	%		81	%
Risk free rate		1.01	%		1.04	%
Expected life (in years)		1.28			2.00

¹  Expected volatility is estimated by considering historic average daily price volatility of the common shares of the Company based on the remaining life of the warrants.

At December 31, 2014, the fair value of the 2014 Tranche 2 Debentures was estimated based on the equivalent fair value of common shares issuable by the Company to settle the remaining $1.5 initial face value, including accrued interest and make-whole provisions payable under the terms of the debenture agreement.

In January 2015, 2014 Tranche 2 Convertible Debentures with a face value of $0.3 were converted into 1,260,224 common shares, representing the conversion and Make-Whole amount. Refer to Note 23.

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13. RELATED PARTY TRANSACTIONS

Transactions with key management personnel

Key management personnel compensation

The Company provides non-cash benefits to directors and executive officers, and contributes to a defined contribution plan on their behalf in addition to regular salaried amounts. In accordance with the terms of the Corporate Stock Option plan, directors and executive officers are entitled to receive stock-based compensation on an annual basis through participation in the Company’s group registered retirement savings plan and through incentives issued under the Company’s corporate stock option and restricted share unit plans. Refer to note 14.

Summary of key management personnel compensation

	December 31 2014		December 31 2013
Short-term employee benefits	$	3.1	$	2.2
Post employment benefits		0.1		0.1
Share-based payments		0.5		1.5
	$	3.7	$	3.8

14. SHAREHOLDERS’ EQUITY

(a) Authorized and Issued Capital Stock

The authorized capital stock of the Company consists of an unlimited number of common shares.

(b) Group Registered Retirement Savings Plan

The Company has a group registered retirement savings plan, in which eligible employees can participate in at their option. Union employees are entitled to an employer contribution of either: (a) $1.00 for each $1.00 contribution up to a maximum of 5% of base salary for employees who have been employed for 6-18 months (maximum $2,500 per year); or (b) $2.00 for each $1.00 contribution up to a maximum of 10% of base salary for employees who have been employed for greater than 18 months (maximum $5,000 per year). Non-union employees are entitled to an employer contribution equal to 3% of base salary plus an employer matching contribution of up to a maximum of 2% of base salary for employees who have been employed for greater than 90 days. The Company contributions are made either in cash or treasury shares of the Company on a quarterly basis. If the matching contribution is made in treasury shares, the price per share issued is the 5-day volume weighted average trading price of the common shares on the Toronto Stock Exchange (“TSX”) preceding the end of the quarter. During the year ended December 31, 2014, the Company contributed 4,024,633 shares with a fair value of $1.4 (2013 – 1,235,996 shares with a fair value of $1.4), which was equal to the market value of the shares on the contribution date.

(c) Flow-through share offerings

On June 7, 2013, the Company entered into a subscription agreement in respect of a fully subscribed private placement of flow-through shares, for aggregate gross proceeds to the Company of approximately $20, with the intention to issue these shares in two tranches, in each case at a 2% premium to the relevant market price (defined as the simple average of the five daily VWAPs on the TSX for the five trading day period ending on the fourth trading day prior to each tranche’s closing date).

On June 19, 2013, the Company completed the first tranche with the issuance of 8,668,009 flow-through common shares at a price of $1.155 per share for net proceeds of $9.6. The Company was required to spend the gross proceeds of $10.0 on eligible exploration and mine development expenditures, which were renounced to investors for the 2013 tax year. As at December 31, 2013, $10.0 was spent.

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On July 23, 2013, the Company completed the second tranche with the issuance of 8,590,328 flow-through common shares at a price of $1.164 per share for net proceeds of $9.4. The Company was required to spend the gross proceeds of $10.0 on eligible exploration and mine development expenditures, which were renounced to investors for the 2013 tax year. As at December 31, 2013, $10.0 was spent.

(d) Corporate Stock Option Plan

The Company has a Corporate Stock Option Plan (the “Plan”), under which eligible directors, officers, employees and consultants of the Company may receive options to acquire common shares. The Plan is administered by the Board of Directors, which will determine after considering recommendations made by the Compensation Committee, the number of options to be issued, the exercise price (which is the 5-day volume weighted average trading price of the common shares on the TSX on the trading day prior to the grant date), expiration dates of each option, the extent to which each option is exercisable (provided that the term of an option shall not exceed 10 years from the date of grant), as well as establishing the time period should the optionee cease to be an “Eligible Person” as set forth in the conditions of the Plan. One third of options granted vest on each of the first three anniversary dates of the date of grant.

The maximum number of common shares issuable under the Plan, and all other share-based compensation arrangements of the company, shall not exceed 3.49% of the issued and outstanding shares of the Company (“the cap”). As at December 31, 2014, of the 5,371,142 options outstanding, 3,771,142 options granted under the Plan were subjected to the cap, which represented 0.98% of the issued and outstanding shares of the Company. At December 31, 2013, 6,240,779 options were available to be granted under the Plan.

The following summary sets out the activity in outstanding common share purchase options:

	At December 31, 2014					At December 31, 2013
	Options			Weighted Average Exercise Price		Options			Weighted Average Exercise Price
Outstanding, beginning of year		3,359,221		$	1.91		4,207,249		$	3.68
Granted		2,596,700		$	0.18		2,473,387		$	1.07
Cancelled/forfeited		(549,779	)	$	2.29		(3,286,665	)	$	3.53
Expired		(35,000	)	$	8.40		(34,750	)	$	3.86
Outstanding, end of year		5,371,142		$	0.99		3,359,221		$	1.91
Options exercisable at end of year		1,341,752		$	2.35		822,508		$	4.05

No options were exercised during the years ended December 31, 2014 or December 31, 2013.

The following table summarizes information about the Company’s stock options outstanding at December 31, 2014:

Exercise price range	Average remaining contractual life (years)		Options Outstanding at December 31, 2014		Options Exercisable at December 31, 2014
$ 0.16-2.50		5.10		4,713,643		727,584
$ 2.51-3.00		2.08		130,000		86,669
$ 3.01-6.00		2.97		404,999		404,999
$ 6.01-8.87		1.26		122,500		122,500
		4.78		5,371,142		1,341,752

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The fair value of options granted during the years ended December 31, 2014 and December 31, 2013 have been estimated at the date of grant using the Black Scholes option pricing model with the following weighted average assumptions:

	December 31 2014			December 31 2013
Awards granted		2,596,700			2,473,387
Weighted average fair value of awards	$	0.09		$	0.55
Pre-vest forfeiture rate		27	%		25	%
Grant price	$	0.18		$	1.07
Market price	$	0.17		$	1.07
Volatility1		76	%		64	%
Risk free rate		1.37	%		1.51	%
Dividend yield		0	%		0	%
Expected life (in years)		4.2			4.3

¹ Expected volatility is estimated by considering historic average share price volatility based on the average expected life of the options.

(e) Reconciliation of the diluted number of shares outstanding:

	December 31 2014		December 31 2013
Net loss available to common shareholders	$	66.7	$	46.2
Effect of dilutive securities		0.2		1.1
Adjusted net loss available to common shareholders	$	66.9	$	47.3
Weighted average number of shares outstanding		338,818,180		187,150,369
Effect of dilutive securities		526,333		25,960
Weighted average diluted number of shares outstanding		339,344,513		187,176,329
Diluted net loss per share	$	0.20	$	0.25

For the years ended December 31, 2014 and December 31, 2013, the dilutive effect related to the potential conversion of restricted share units. The dilutive effects of the convertible debentures, warrants, and stock options have not been included in the determination of diluted loss per share because to do so would be anti-dilutive.

(f) Other Stock-Based Compensation – Restricted Share Unit Plan

The Company has a Restricted Share Unit Plan (“RSU”) under which eligible directors, officers and key employees of the Company are entitled to receive awards of RSUs. Each RSU is equivalent in value to the fair market value of a common share of the Company on the date of the award and a corresponding liability is established on the balance sheet. The RSU is administered by the Board of Directors, which will determine after considering recommendations made by the Compensation Committee, the number and timing of RSUs to be awarded and their vesting periods, not to exceed three years. The value of each award is charged to compensation expense over the period of vesting. At each reporting date, the compensation expense and liability are adjusted to reflect the changes in market value of the liability based on the fair values of RSU’s for each vesting period determined using the Black-Scholes model.

As at December 31, 2014, 1,221,126 (December 31, 2013 – 708,609) restricted share units had been granted and were outstanding at an aggregate value of $0.1 (December 31, 2013 – $0.5).

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(g) Summary of Share-based compensation and employee benefits

The following table details the components of share-based compensation expense:

	Year ended December 31, 2014			Year ended December 31, 2013
Registered retirement savings plan	$	1.4		$	1.4
Common share stock options		0.6			—
Restricted share units		(0.2	)		0.2
	$	1.8		$	1.6

As at December 31, 2014, the number of shares issued or issuable pursuant to awards made under all share-based compensation plans of the Company, which were subject to the cap, represents 1.29% of the Company’s total issued and outstanding common shares.

(h) Other Stock-Based Settlements

On March 8, 2013, the Company settled an obligation of $1.0 relating to NAP Quebec achieving specified production targets through the issuance of 709,220 common shares of the Company.

15. FINANCIAL INSTRUMENTS

The Company has exposure to the following risks from its use of financial instruments: credit risk, market risk, currency risk, interest rate risk, commodity price risk and liquidity risk.

Credit Risk

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Company limits credit risk by entering into business arrangements with high-quality counterparties.

The Company’s exposure arises from its cash and cash equivalents, accounts receivable and HST receivable. The Company invests its cash and cash equivalents primarily with major Canadian banks and sells its product to large international companies with strong credit ratings. Historically, the Company has not experienced any losses related to individual customers or HST receivable.

The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was:

	At December 31 2014		At December 31 2013
Cash and cash equivalents	$	4.1	$	9.8
Accounts receivable		75.4		38.6
HST receivable		0.8		4.4
	$	80.3	$	52.8

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Market Risk

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk is comprised of currency, interest rate, and commodity price risks.

Currency risk

Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. Currency risk is related to the portion of the Company’s business transactions denominated in currencies other than Canadian dollars. The Company is exposed to fluctuations in exchange rates due to revenues, certain of its long-term debt and foreign based suppliers being in foreign currencies. The Company’s primary exposure is based upon the movements of the US dollar against the Canadian dollar. The Company’s foreign exchange risk management includes, from time to time, the use of foreign currency forward contracts to fix exchange rates on certain foreign currency exposures.

For the Company’s foreign exchange transactions, fluctuations in the respective exchange rates relative to the Canadian dollar will create volatility in the Company’s cash flows and the reported amounts for revenue, operating costs, and exploration costs on a year-to-year basis. Additional earnings volatility arises from the translation of monetary assets and liabilities denominated in currencies other than Canadian dollars at the rates of exchange at each balance sheet date, the impact of which is reported as a separate component of revenue or foreign exchange gain or loss in the consolidated statements of operations and comprehensive loss.

The Company is exposed to the following currency risk on cash, accounts receivable, accounts payable and borrowings at December 31, 2014.

	US$
Cash	$	1.6
Accounts receivable		65.0
Accounts payable and accrued liabilities		(5.7	)
Credit facility		(31.7	)
Long-term debt		(173.2	)
	$	(144.0	)

A 1% strengthening or weakening of the Canadian dollar against the US dollar, assuming that all other variables remained the same, would have resulted in a $1.4 decrease or increase, respectively, in the Company’s statement of loss and comprehensive loss for the year ended December 31, 2014.

The Company’s revenue is affected by currency exchange rates, such that a weakening in the Canadian dollar relative to the US dollar will result in additional revenues and a strengthening in the Canadian dollar will result in reduced revenues.

Interest rate risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company does not enter into derivative financial instruments for speculative purposes. The Company does not hold any specific hedging instruments, nor does it hold any short term investments that would be significantly impacted from fluctuations in interest rates. Any interest rate fluctuations realized are expected to be offset by favourable changes in the interest on debt instruments.

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A 1% increase or decrease in the interest rate on the Company’s credit facility would have not have a significant impact on the Company’s statement of loss and comprehensive loss for the year ended December 31, 2014.

Commodity price risk

Commodity price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in commodity prices. The Company is particularly exposed to fluctuations in commodity prices from its sale of metals. From time to time the Company may enter into forward commodity sales contracts to hedge the effect on revenues of changes in the price of metals it produces. Gains and losses on derivative financial instruments used to mitigate metal price risk are recognized in revenue from metal sales over the term of the hedging contract.

The Company enters into financial contracts to mitigate the smelter agreements’ provisional pricing exposure to rising or declining palladium prices and an appreciating Canadian dollar for past production already sold. The total of these financial contracts represent 12,800 ounces as at December 31, 2014 (31,000 ounces as at December 31, 2013). These contracts mature in February 2015 (2013 - January 2014 through April 2014) at an average forward price of $942 per ounce (or US$812 per ounce) (2013 - $768 per ounce (or US$735 per ounce)). For substantially all of the palladium delivered to the customers under the smelter agreements, the quantities and timing of settlement specified in the financial contracts matches final pricing settlement periods. The palladium financial contracts are being recognized on a mark-to-market basis as an adjustment to revenue. The fair value of these contracts at December 31, 2014 was a receivable of $0.2 included in accounts receivable (December 31, 2013 - $0.2).

As at December 31, 2014, the Company’s exposure to commodity price is limited to accounts receivable associated with provisional pricing of metal concentrate sales particularly palladium. A 1% strengthening or weakening of the palladium price would have resulted in an approximate $0.1 decrease or increase, respectively, in the Company’s loss and comprehensive loss for the year ended December 31, 2014.

Liquidity Risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company’s liquidity may be adversely affected by operating performance, a downturn in capital market conditions impacting access to capital markets, or entity-specific conditions. The Company manages liquidity risk by maintaining adequate cash and cash equivalent balances, by having adequate available credit facilities, by preparing and monitoring detailed budgets and cash flow forecasts for mining, exploration and corporate activities, and by monitoring developments in the capital markets. Forecasting takes into account the Company’s debt financing, covenant compliance and the maturity profile of financial assets and liabilities and purchase obligations.

The table below analyzes the Company’s financial liabilities which will be settled into relevant maturity groupings based on the remaining balances at December 31, 2014 to the contractual maturity date.

	Total		In less than 1 year		Between 1 year and 3 years		More than 3 years
Accounts payable and accrued liabilities	$	28.8	$	28.8	$	—	$	—
Credit facility		36.8		36.8		—		—
Obligations under finance leases		18.8		4.6		13.7		0.5
Long-term debt		226.1		7.3		218.8		—

The Company also has asset retirement obligations in the amount of $15.8 that would become payable at the time of the closure of its LDI mine. As the Company issued letters of credit of $14.1 related to these obligations, $1.7 additional funding is required prior to or upon closure of these properties. The letter of credit obligation is not included in the table above. Refer to notes 9 and 10 for additional disclosures regarding these amounts. The majority of the asset retirement costs are expected to be incurred within one year of mine closure. Refer also to note 17.

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Fair Values

The Company’s financial assets and liabilities consist of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, credit facility, current derivative liabilities, obligations under finance leases and long-term debt.

Cash and cash equivalents, accounts receivable, current derivative liabilities, and 2014 Tranche 1 and Tranche 2 debentures and warrants are stated at fair value. The carrying value of other assets and trade accounts payable and accrued liabilities and the amount outstanding under the credit facility approximate their fair values due to the immediate or short-term maturity of these financial instruments.

Derivatives

The fair value of forward exchange contracts is based on their listed market price, if available. If a listed market price is not available, then fair value is estimated by discounting the difference between the contractual forward price and the current forward price for the residual maturity of the contract using a risk-free interest rate.

Fair values reflect the credit risk of the instrument and include adjustments to take into account the credit risk of the Company entity and counterparty when appropriate.

The Company enters into financial contracts to mitigate the smelter agreements’ provisional pricing exposure to rising or declining palladium prices and an appreciating Canadian dollar for past production already sold. For substantially all of the palladium delivered to customers under smelter agreements, the quantities and timing of settlement specified in the financial contracts matches final pricing settlement periods. The palladium financial contracts are being recognized on a mark-to-market basis as an adjustment to revenue.

The derivative liability relating to the palladium warrants issued in connection with the 2011 senior secured note issuance was measured at fair value prior to the maturity and exercise of the warrants in October 2014. Refer to note 12.

Other non-derivative financial liabilities

The fair values of the senior secured term loan, 2012 convertible debentures and finance leases, which are determined for disclosure purposes, are calculated based on the present value of future principal and interest cash flows, discounted at the estimated market rate of interest at the reporting date. For finance leases the estimated market rate of interest is determined by reference to similar lease agreements.

The fair values of the non-derivative financial liabilities are comprised of the following as at each reporting date:

	At December 31 2014		At December 31 2013
Senior secured term loan	$	201.0	$	183.5
Convertible debentures (2012)		45.2		43.0
Finance leases		18.8		11.7

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Fair Value Hierarchy

The table below details the fair values of the assets and liabilities at December 31, 2014:

	Notes		Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Aggregate Fair Value
Financial assets
Cash and cash equivalents			$	4.1		$	—		$	—	$	4.1
Accounts receivable		5		—			75.2			—		75.2
Fair value of financial contracts*		5		—			0.2			—		0.2
Financial liabilities
Senior secured term loan				—			201.0			—		201.0
Convertible debentures (2012)				—			45.2			—		45.2
Finance leases				—			18.8			—		18.8
Fair value of convertible debentures and warrants		12		(0.4	)		(1.8	)		—		(2.2	)
Net carrying value			$	3.7		$	338.6		$	—	$	342.3

* As detailed in note 5, the asset relating to the mark-to-market on financial contracts is included in the carrying value of accounts receivable on the balance sheet.

The table below details the fair values of the assets and liabilities at December 31, 2013:

	Notes		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Aggregate Fair Value
Financial assets
Cash and cash equivalents			$	9.8	$	—		$	—	$	9.8
Accounts receivable		5		—		38.6			—		38.6
Fair value of financial contracts*		5		—		0.2			—		0.2
Other		7		0.2		—			—		0.2
Financial liabilities
Senior secured term loan				—		183.5			—		183.5
Convertible debentures (2012)				—		43.0			—		43.0
Finance leases				—		11.7			—		11.7
Fair value of current derivative liability		12		—		(0.5	)		—		(0.5	)
Net carrying value			$	10.0	$	276.5		$	—	$	286.5

* As detailed in note 5, the asset relating to the mark-to-market on financial contracts is included in the carrying value of accounts receivable on the balance sheet.

16. CAPITAL DISCLOSURE

The Company’s objective is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business.

Management defines capital as the Company’s total shareholders’ equity and any outstanding debt. The board of directors does not establish quantitative return on capital criteria for management but rather promotes year over year sustainable profitable growth.

In order to maintain or adjust the capital structure, the Company may issue new shares, issue new debt or replace existing debt with different characteristics.

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17. COMMITMENTS

(a) Sheridan Platinum Group of Companies (“SPG”) Commitment

The Company is required to pay a 5% net smelter royalty to SPG from mining operations at the Lac des Iles mine. This obligation is recorded as royalty expense.

(b) Operating Leases and Other Purchase Obligations

As at December 31, 2014, the Company had outstanding operating lease commitments and other purchase obligations of $2.8 and $5.1 respectively (December 31, 2013 – $4.4 and $1.0 respectively) the majority of which had maturities of less than five years (see also note 11).

(c) Letters of Credit

As at December 31, 2014, the Company had outstanding letters of credit of $15.4, consisting of $14.4 for various mine closure deposits and $1.0 for a regulated energy supplier (December 31, 2013 - $15.4 outstanding letters of credit, consisting of $14.4 for various mine closure deposits and $1.0 for a regulated energy supplier).

18. REVENUE FROM METAL SALES

	Total		Palladium		Platinum			Gold			Nickel			Copper			Other Metals
2014
Year ended December 31
Revenue – before pricing adjustments1	$	215.7	$	155.8	$	19.6		$	16.1		$	13.8		$	10.3		$	0.1
Pricing adjustments:
Commodities		1.8		2.2		(0.5	)		0.2			0.2			(0.3	)		—
Foreign exchange		2.6		1.4		0.5			0.3			0.2			0.2			—
Revenue – after pricing adjustments	$	220.1	$	159.4	$	19.6		$	16.6		$	14.2		$	10.2		$	0.1
2013
Year ended December 31
Revenue – before pricing adjustments1	$	152.3	$	101.5	$	15.7		$	15.2		$	10.1		$	9.6		$	0.2
Pricing adjustments:
Commodities		—		1.5		(0.4	)		(0.8	)		(0.3	)		—			—
Foreign exchange		0.9		—		0.4			0.3			0.1			0.1			—
Revenue – after pricing adjustments	$	153.2	$	103.0	$	15.7		$	14.7		$	9.9		$	9.7		$	0.2

¹  Totals for the year ended December 31, 2013 exclude gold and silver revenues amounting to $0.2 relating to the Company’s NAP Quebec subsidiary. Revenues for NAP Quebec have been reported separately as part of discontinued operations. Refer to note 4.

During 2014, the Company delivered all of its concentrate to three customers under the terms of the respective agreements (2013 – two customers).

Although the Company sells its bulk concentrate to a limited number of customers, it is not economically dependent upon any one customer as there are other markets throughout the world for the Company’s concentrate.

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2014 Annual Report

North American Palladium Ltd.

19. INTEREST EXPENSE AND OTHER COSTS AND OTHER INCOME

	Note		2014			2013
Interest expense & other costs
Interest on finance leases			$	0.6		$	0.8
Asset retirement obligation accretion		9		0.4			0.3
Accretion expense on long-term debt				2.8			3.2
Loss on investments				0.7			2.3
Interest expense				37.3			0.3
Change in fair value of palladium warrants				0.6			—
Change in fair value of convertible debentures				6.2			—
Legal settlement		20		1.0			—
			$	49.6		$	6.9
Other income
Change in fair value of palladium warrants				—		$	(1.1	)
Change in fair value of warrants				(4.6	)		—
Other income on renouncement of flow-through expenditures				—			(0.8	)
Interest income				(0.1	)		(0.1	)
				(4.7	)	$	(2.0	)
			$	44.9		$	4.9

20. CONTINGENCIES

From time to time, the Company is involved in litigation, investigations, or proceedings related to claims arising in the ordinary course of business. The Company considers its provisions for outstanding and pending legal claims to be adequate. The final outcome with respect to actions outstanding or pending as at December 31, 2014 cannot be predicted with certainty.

(a) B.R. Davidson Claim

In 2000, LDI and B.R. Davidson Mining & Development Ltd. (“Davidson”) entered into a construction contract whereby Davidson agreed to construct an expanded tailings management facility at the LDI Mine. LDI declared Davidson to be in default of the contract on February 2, 2001 and made a demand under a performance bond issued by AXA Pacific Insurance Company (“AXA”). Davidson was the principal named in the bond and the indemnitors were Davidson, Atikokan Ready Mix Ltd., Blaine R. Davidson, Bruce R. Davidson and Marlene Davidson. AXA commenced an action against the indemnitors. All of the indemnitors other than Marlene Davidson commenced a third party action against LDI, LDI’s engineers, and LDI’s bond broker. The third party action was for $10.9 in the event that the construction contract was enforced or approximately $3 in the event the construction contract was not enforced plus other damage claims for between $10 and $15 plus costs and interest. LDI had a counterclaim against Davidson for $10.7 in liquidated damages for breach of contract and approximately $2.6 in principal and interest judgments against Davidson related to subtrade liens.

On July 2, 2014, the Company entered into an agreement to settle the third party action and all other claims. Under the terms of the settlement the Company paid $1.0 to Davidson’s counsel in trust, a portion of which may only be released upon the satisfaction of certain conditions. The settlement is recorded in interest expense and other costs. Refer to note 19.

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2014 Annual Report

North American Palladium Ltd.

(b) Class Action

In 2011, the Company became aware that a statement of claim had been filed with the Ontario Superior Court of Justice against the Company and two of its former officers regarding a potential class action lawsuit. The statement of claim sought permission of the court to commence a class action proceeding for alleged misrepresentations in the Company’s public disclosure. In 2012, a fresh Statement of Claim was filed increasing the amount of the claim to $100.

On June 24, 2014, the Company entered into a settlement agreement, subject to court approval. On June 26, 2014, the $2.4 settlement was paid into escrow by the Company’s insurer. The class action settlement was approved by the court on September 16, 2014.

21. INCOME TAXES

Rate Reconciliation

The provision for income and mining taxes differs from the amount that would have resulted by applying the combined Canadian Federal and Ontario statutory income tax rates of approximately 26.5% (2013 – 26.5%):

	December 31 2014			December 31 2013
Income tax recovery using statutory income tax rates	$	(17.7	)	$	(13.4	)
Increase (decrease) in taxes resulting from:
Change in unrecognized temporary differences		14.9			19.3
Statutory permanent differences		2.6			(6.1	)
Recognition of Ontario Resource Tax Credits		—			(2.2	)
Difference in statutory tax rates		0.2			0.2
Income tax (recovery) expense	$	—		$	(2.2	)

Components of Income tax expense

The details of the Company’s income tax expense (recovery) are as follows:

	December 31 2014		December 31 2013
Current income tax expense (recovery):
Current period	$	—	$	(0.8	)
Adjustments for prior period		—		(1.4	)
Total	$	—	$	(2.2	)

Deferred tax liabilities

At December 31, 2014 and December 31, 2013, net deferred tax liabilities were $nil and there were no changes in deferred tax liabilities.

Unrecognized deferred tax assets

Deferred income tax assets have not been recognized in respect of the following items:

	December 31 2014		December 31 2013
Loss carryforwards	$	97.1	$	95.4
Deductible temporary differences, income taxes	$	43.6	$	29.3
Deductible temporary differences, mining taxes	$	3.3	$	3.7

The tax losses not recognized expire as per the amount and years noted below. The deductible temporary differences do not expire under current tax legislation. Deferred tax assets have not been recognized in respect of these items because it is not probable that future taxable profit will be available against which the Company can utilize the benefits there from.

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2014 Annual Report

North American Palladium Ltd.

Income tax attributes

As at December 31, 2014, the Company had the following approximate income tax attributes to carry forward:

	Amount		Expiry Date
Non-capital losses	$	318.4		2015 - 2034
Capital losses	$	109.7		Indefinite
Undepreciated capital cost allowance	$	196.7		Indefinite
Tax basis of mining interests	$	318.8		Indefinite

22. OTHER DISCLOSURES

Statement of Cash flows

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

	2014			2013
Cash provided by (used in):
Accounts receivable	$	(36.9	)	$	15.4
Inventories		(0.7	)		1.0
Other assets		2.6			(0.9	)
Accounts payable and accrued liabilities		(17.0	)		(13.7	)
Taxes payable		(1.2	)		(2.0	)
	$	(53.2	)	$	(0.2	)

23. SUBSEQUENT EVENT

In January 2015, 2014 Tranche 2 Convertible Debentures with a face value of $0.8 were converted into 3,072,060 common shares. Refer to Note 12.

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2014 Annual Report