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Form 6-K

SECURITIES AND EXCHANGE COMMISSION
Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16 of
The Securities Exchange Act of 1934

For the month of March, 2008	 	Commission File Number: 1-15142	
NORTH AMERICAN PALLADIUM LTD.
 (Name of Registrant)
130 Adelaide Street West
Suite 2116
Toronto, Ontario
Canada M5H 3P5
 (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	 	o	 	Form 40-F	 	ý	
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):  o
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):  o
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	 	o     Assigned	 	File No.	 	                                    	 	No	 	ý	
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), which was originally filed with the Securities and Exchange Commission (the " SEC ") in July 2001 and the registration statements on Form F-10 originally filed with the SEC in May 2006 (File No. 333-133668), June 2006 (File No. 333-134764), August 2006 (File No. 333-136317), October 2006 (File No. 333-137822), December 2006 (File No. 333-139137), February 2007 (File No. 333-140478), April 2007 (File No. 333-141902), June 2007 (File No. 333-143528), August 2007 (File No. 333-145210), October 2007 (File No. 333-146513) and November 2007 (File No. 333-147126).

 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: March 20, 2008	

 	

 	
By:	
/s/   TRENT MELL       

Trent Mell
Vice President, General Counsel and
Corporate Secretary	

 EXHIBIT INDEX

Exhibit
	 	Description of Exhibit
	
1	 	North American Palladium — 2007 Audited Financial Statements	
2	 	North American Palladium — 2007 MD&A	
3	 	Press Release announcing Q4 and Year-End 2007 Financial Results	

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SIGNATURES
 EXHIBIT INDEX

Management's Discussion and Analysis
The following is management's discussion and analysis ("MD&A") of the financial condition and results of operations to enable a reader to assess material changes in financial condition and results of operations for the year ended December 31, 2007, compared to those of the respective periods in the prior years. This MD&A has been prepared as of March 18, 2008 and is intended to supplement and complement the audited consolidated financial statements and notes thereto for the year ended December 31, 2007 (collectively, the "Financial Statements"). You are encouraged to review the Financial Statements in conjunction with your review of this MD&A and the most recent Form 40-F/Annual Information Form on file with the US Securities and Exchange Commission and Canadian provincial securities regulatory authorities. All amounts are in Canadian dollars unless otherwise noted.
INDUSTRY OVERVIEW
Platinum Group Metals
Palladium is one of the six platinum group metals ("PGMs"), along with platinum, rhodium, ruthenium, iridium and osmium. Economically, the three most significant PGMs are palladium, platinum and rhodium. The primary use for palladium is in the manufacture of catalytic converters in the automotive industry. It is also used in the manufacture of jewellery and electronics, and in dental and chemical applications.
Supply
Palladium is typically produced as a by-product metal from platinum mines. According to the CPM Group, most of the world's palladium is produced in Russia (35%), the Republic of South Africa (34%) and North America (12%). Global supply of palladium increased by approximately 3% in 2006 (the last year for which data is available) to 8,437,000 ounces. Of this total, mine production accounted for approximately 7,030,000 ounces (an increase of 3% from the prior year) and secondary recovery of palladium accounted for approximately 1,407,000 ounces.
Demand
Global fabrication demand for palladium (excluding investor demand) increased by 11.0% in 2006 to approximately 7,722,000 ounces, primarily as a result of the strong performance of the industries that use palladium and the relative attractiveness and affordability of palladium compared to substitutes (such as platinum, rhodium and gold). The year 2006 represented the third consecutive year of double-digit growth in palladium demand, and the fifth consecutive year of growth in palladium demand overall.
Approximately 50% of the global demand for palladium in 2006 stemmed from the automotive industry. The majority of the balance of palladium demand in 2006 stemmed from electronics (16%), jewellery (4%), Chinese demand for electronics and jewellery (10%), dental applications (13%) and other chemical applications (5%).
The primary use for palladium in the automotive industry is in the manufacture of catalytic converters, which reduce harmful vehicle exhaust emissions by converting them into less harmful carbon dioxide, nitrogen and water vapour. Palladium, platinum and rhodium are the primary components in catalytic converters. The demand for palladium in the automotive industry has more than doubled in the last ten years due to the larger number of vehicles being manufactured and the tightening of emissions standards that require the use of catalytic converters. Catalytic converters are now included in over 96 percent of new cars. With the palladium price currently substantially below that of platinum, automakers have a strong financial incentive to switch their catalyst formulations for gasoline vehicles from those based on platinum to palladium.
Palladium is also used in the manufacture of jewellery and may be used either on its own or as an alloy in "white gold". In the electronics industry, palladium is used mainly in the production of multi-layer ceramic capacitors, which are used in electrical components for cellular telephones, personal and notebook computers, fax machines and home electronics. In the dental industry, palladium is widely used in alloys for dental restoration. Additionally, various chemical applications use palladium, including the
1

manufacture of paints, adhesives, fibers and coatings. Palladium is also used in the manufacture of polyester.
An important macroeconomic trend has been increased investor demand for palladium by virtue of its association with other precious metals (e.g., platinum and rhodium). Strong investor sentiment for these precious metals has provided support for a favorable palladium pricing environment.
COMPANY OVERVIEW
Overview of North American Palladium's Business
North American Palladium is Canada's only primary producer of PGMs, producing an estimated 4% of annual global palladium production. While the bulk of the Company's revenue is derived from the sale of palladium, the Company also generates a considerable portion of its revenue from the sale of platinum, nickel, gold, and copper, all of which are by-products of the Company's palladium mining operations. North American Palladium's principal properties and projects are the Lac des Iles property (including the Lac des Iles mine and the Offset High Grade Zone ("OHGZ")), the Shebandowan West Project and the Arctic Platinum Project ("APP").
Lac des Iles Property
Lac des Iles mine
The Company owns and operates the Lac des Iles mine located 85 kilometers from Thunder Bay, Ontario, Canada. The Lac des Iles mine consists of an open pit mine, an underground mine and two processing plants (one of which is currently idle). The primary deposit on the property is the Roby Zone, a PGM deposit. The Company began mining the Roby Zone in 1993 using open pit mining methods. In April 2006, an underground mine went into commercial production to access a higher grade portion of the Roby Zone.
Offset High Grade Zone
The OHGZ is located on the Lac des Iles property and was discovered by the Company's exploration team in 2001. The OHGZ is believed to be the fault-displaced continuation of the Roby Zone mineralization and is located below and approximately 250 meters to the west of the Roby Zone. A mineral resource estimate prepared by Scott Wilson Roscoe Postle Associates Inc. ("Scott Wilson RPA") in October 2007 estimated that the OHGZ has more than three times the mineral resources of the current underground mine at the Roby Zone at similar grades, while still being open along strike to the north, south and at depth.
Shebandowan West Project
On December 10, 2007, the Company earned a 50% interest in the former producing Shebandowan mine and the surrounding Haines and Conacher properties pursuant to an option and joint venture agreement with Vale Inco. The Shebandowan West Project contains a series of nickel-copper-PGM mineralized bodies and is located approximately 100 kilometers southwest of the Company's Lac des Iles mine. On October 25, 2007, the Company announced the completion of a NI 43-101 compliant mineral resource estimate for the Shebandowan West Project by an independent Qualified Person. Management is considering a mine development scenario that would entail excavation of the Shebandowan West Project by means of ramp-accessed underground mining methods at a rate of 500 to 1,000 tonnes per day, crushing the material on site and transporting it by truck to the Lac des Iles property for processing at the original mill on the Lac des Iles property. If plans proceed as expected, production at the Shebandowan West Project could commence in 2009.
Arctic Platinum Project
The APP is comprised of a series of advanced-stage nickel-copper-PGM exploration projects located approximately 60 kilometers south of the city of Rovaniemi, Finland. The Company is party to an agreement with subsidiaries of Gold Fields Limited of South Africa ("Gold Fields") entitling it to earn up to a 60% interest in the APP. Management believes that the Company will satisfy the conditions of its earn-in right by August 31, 2008, which will include completion of a re-scoping study and exploration
2

program, completion of a feasibility study, and the preparation of the initial form of development proposal and associated budget.
To date, three areas of the APP have been explored by North American Palladium: (i) the Suhanko deposits, (ii) the Narkaus deposits, and (iii) the Penikat deposits. At Suhanko, the Company is studying a development scenario consisting of two open pit mines at two deposits located three kilometers from each other. Under this scenario, the nickel-copper-PGM bearing material would be processed through a centrally-located concentrator at a nominal throughput rate of five million tonnes per year. Additionally, management believes that the economics of the development scenario might be enhanced by the development of two higher grade deposits at Narkaus. A scoping study on the Suhanko deposits completed by Aker Kvaerner in October 2007 indicated that the mineral resources could potentially support a 20-year mine life at 7.5 million tones per annum. To this end, the Company has retained Aker Kvaerner to prepare a feasibility study for the Suhanko deposits.
Year Ended December 31, 2007 Highlights
•
Revenue for the year ended December 31, 2007 of $195.9 million increased by $36.7 million (23%).

•
Operating cash flow for the year (before changes in non-cash working capital) 1 improved by $36.9 million to $46.8 million compared to operating cash flow of $9.9 million in 2006.

•
The net loss for the year ended December 31, 2007 was $28.7 million or $0.51 per share compared to a net loss of $34.1 million or $0.65 per share in 2006. The net loss for the year includes a net negative impact of $19.0 million (2006 – negative impact of $3.7 million) due to foreign exchange gains and losses.

•
Palladium production of 286,334 ounces increased 21% compared to last year.

•
Palladium sales for the year were recorded at an average price of US$356 per ounce compared to US$319 per ounce last year. The Company's performance is highly correlated to prevailing palladium and by-product metal prices as it continues to sell all its metal production into the spot markets.

•
Palladium accounted for 47% of the year's total revenues while platinum and nickel continued to be important sources of revenue, at 16% and 22% of the year's total revenue respectively.

•
Cash cost per ounce of palladium produced, 1 net of by-product metal revenues and royalties, was US$164 for 2007 compared to US$201 the previous year, primarily due to the increased production volumes and stronger by-product prices, partially offset by the impact of the strengthening Canadian dollar on both costs and by-product revenue realized.

•
On December 10, 2007, the Company earned a 50% interest in the former producing Shebandowan mine and the surrounding Haines and Conacher properties pursuant to an option and joint venture agreement with Vale Inco.

•
The Company's debt position at December 31, 2007 was $39.1 million and reflects a reduction of $35.8 million (48%) compared to the debt position at December 31, 2006 of $74.9 million.

•
In December 2007 the Company completed an equity offering of 18.7 million units at a price of US$4.00 per unit. In connection with the offering the Company granted the underwriter's an over- allotment option of 15% at the same price. This option was subsequently exercised in January 2008, increasing the gross proceeds of the offering to US$85.9 million. 

1
Non-GAAP measure. Reference should be made to footnote 1 at the end of this MD&A.
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Key Results

Operating Results
Year Ended December 31	 	2007	 	2006	*	2005	 	
	
Palladium (oz)	 	286,334	 	237,338	 	177,167	 	
Payable Palladium (oz)	 	263,046	 	217,022	 	161,469	 	
Platinum (oz)	 	24,442	 	22,308	 	18,833	 	
Gold (oz)	 	20,092	 	17,237	 	14,308	 	
Copper (lbs)	 	5,536,044	 	5,155,588	 	5,514,670	 	
Nickel (lbs)	 	3,066,973	 	2,721,042	 	2,353,227	 	
	
Ore Tonnes Milled	 	5,006,383	 	4,570,926	 	4,780,599	 	
Ore Tonnes Mined – Underground	 	768,841	 	721,179	 	–	 	
Ore Tonnes Mined – Open Pit	 	4,374,225	 	3,926,911	 	3,705,555	 	
Waste Tonnes Mined – Open Pit	 	7,231,026	 	8,888,037	 	11,619,658	 	
	
Waste Strip Ratio	 	1.65:1	 	2.26:1	 	3.14:1	 	
	
*
Metal production, tonnes milled and underground ore tonnes mined include pre-production activities from the underground mine that was not recorded as revenue but rather offset against the underground mine's capital development costs. Metal production from the underground pre-production included 9,004 oz of palladium and other associated by-product metals.
Selected Annual Information

(thousands of dollars)	 	 	2007	 	 	2006	 	 	2005	 	 	
	
Revenue after pricing adjustments	 	$	195,932	 	$	159,200	 	$	92,606	 	 	
Net loss	 	 	(28,680	)	 	(34,109	)	 	(53,611	)	 	
Add back (deduct):	 	 	 	 	 	 	 	 	 	 	 	
 	Exploration costs	 	 	12,138	 	 	11,831	 	 	7,927	 	 	
 	Non-Cash Items:	 	 	 	 	 	 	 	 	 	 	 	
 	 	– Amortization	 	 	46,908	 	 	30,103	 	 	18,297	 	 	
 	 	– Accretion of convertible notes	 	 	12,947	 	 	10,090	 	 	–	 	 	
 	 	– Other non-cash items 1	 	 	15,653	 	 	3,828	 	 	(1,146	)	 	
	
Net income (loss) before exploration and non-cash items 1	 	$	58,966	 	$	21,743	 	$	(28,533	)	 	
	
Net loss per share (dollars)	 	 	 	 	 	 	 	 	 	 	 	
 	•  Basic	 	$	(0.51	)	$	(0.65	)	$	(1.03	)	 	
 	•  Fully diluted	 	$	(0.51	)	$	(0.65	)	$	(1.03	)	 	
Cash dividends declared	 	 	Nil	 	 	Nil	 	 	Nil	 	 	
Cash flow from operations prior to changes in non-cash working capital	 	 	46,828	 	 	9,912	 	 	(36,460	)	 	
Total Assets	 	 	305,374	 	 	265,157	 	 	238,357	 	 	
Total Long-term debt, including current portion	 	 	39,081	 	 	74,906	 	 	46,272	 	 	
	
1
Non-GAAP measure. Reference should be made to footnote 1 at the end of this MD&A.
RESULTS OF OPERATIONS
Revenue
For the year ended December 31, 2007 the Company had revenue of $195.9 million compared to revenue of $159.2 million in 2006. The loss from mining operations for the year ended December 31, 2007 was $19.4 million, an increase of $1.3 million (7%), compared to the loss of $18.1 million last year.
Revenue is affected by sales volumes, commodity prices and currency exchange rates. Sales of metals in concentrate are recognized in revenue when concentrate is delivered to a third party smelter for treatment, however, final pricing is not determined until the refined metal is sold, which can be up to six months later. Accordingly, revenue in the year is based on current US dollar denominated commodity
4

prices and foreign exchange rates for sales occurring in the year and ongoing pricing adjustments from prior sales that are still subject to final pricing. These final pricing adjustments 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 US dollar will result in additional revenues and a strengthening in the Canadian dollar will result in reduced revenues. Effective April 1, 2007, the amount of the final pricing adjustments recognized on any commodity price changes will also be reduced by any price participation deductions as provided for in the Company's smelting and refining agreement. The Canadian dollar strengthened by 17% against the US dollar to $1.01 at December 31, 2007 compared to $0.86 at December 31, 2006.
Recorded Metal Prices and Average Exchange Rates

 	 	 	2007	 	 	2006	 	 	2005	 	
	
Palladium – US$/oz	 	$	356	 	$	319	 	$	230	 	
Platinum – US$/oz	 	$	1,364	 	$	1,140	 	$	815	 	
Gold – US$/oz	 	$	726	 	$	610	 	$	442	 	
Nickel – US$/lb	 	$	15.58	 	$	11.68	 	$	6.60	 	
Copper – US$/lb	 	$	3.30	 	$	3.02	 	$	1.50	 	
	
US/C$ exchange rate (Bank of Canada)	 	US$	0.93	 	US$	0.88	 	US$	0.83	 	
	
For the year ended December 31, 2007, revenue before pricing adjustments of $201.4 million increased $55.5 million (38%) from 2006, reflecting higher volumes and improved pricing of $68.7 million, partially offset by the impact of unfavourable foreign exchange rates of $13.2 million. Negative pricing adjustments from settlements and the mark-to-market of concentrate awaiting settlement for the year ended December 31, 2007 reduced revenue by $5.4 million ($14.2 million negative foreign exchange adjustment, partially offset by a $8.8 million favourable commodity price adjustment). This compares with favourable adjustments for the year ended December 31, 2006 of $13.4 million ($11.7 million favourable commodity price adjustment and a $1.7 million positive foreign exchange adjustment). For the year ended December 31, 2007, revenue after pricing adjustments was $195.9 million, an increase of $36.7 million (23%), compared to revenue of $159.2 million last year.
For the year ended December 31, 2007, palladium sales were recorded at US$356 per ounce, up 12% compared to US$319 in the 2006. Revenue in 2007 from the sale of palladium before pricing adjustments increased to $95.1 million from $70.6 million, and after pricing adjustments increased by 21% to $91.8 million (47% of total revenue) compared to $75.6 million (48% of total revenue) in 2006.
For the year ended December 31, 2007, total by-product revenues after pricing adjustments increased by 25% to $104.1 million, as compared to $83.6 million in 2006. In particular, platinum, gold and nickel sales saw strong growth of 27%, 32% and 28% respectively, reflecting increased sales volumes and higher commodity prices.
Operations
For the year ended December 31, 2007, palladium ounces produced increased by 21%. The mill processed 5,006,383 tonnes of ore or an average of 13,716 tonnes per day, producing 286,334 ounces of palladium compared to 4,570,926 tonnes of ore or an average of 12,523 tonnes per day, producing 237,338 ounces of palladium in 2006. In 2007, the average palladium head grade was 2.39 grams per tonne compared to 2.18 grams per tonne in 2006. The improved head grade can be attributed in part to a full year of production from the underground mine, which commenced commercial production in April 2006. For the year ended December 31, 2007, 768,841 tonnes of ore was extracted from the underground mine, with an average palladium grade of 5.79 grams per tonne. During the nine months ended December 31, 2006, 617,634 tonnes of ore was extracted from the underground mine, with an average palladium grade of 5.96 grams per tonne. For 2007 the palladium recoveries were 74.8%, compared to 74.0% in 2006.
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In the Lac des Iles open pit, for the year ended December 31, 2007, 4,374,225 tonnes of ore were extracted with an average palladium grade of 1.79 grams per tonne compared to 3,926,911 tonnes at an average palladium grade of 1.63 grams per tonne the previous year. For the year ended December 31, 2007 the strip ratio improved to 1.65 compared to 2.26 in 2006.
The mill's increased results reflect continued improvement to the throughput and availability due to Company personnel identifying and systematically resolving issues.
Operating Expenses
For the year ended December 31, 2007, total production costs of $125.1 million increased by $12.6 million (11%) compared to 2006, mainly due to the inclusion of the underground mine production costs for the three months ended March 31, 2007 of $8.1 million, which for the corresponding period in 2006, were capitalized as pre-production costs. Unit cash costs 1 to produce palladium (production costs including overhead and smelter treatment, refining and freight costs), net of by-product metal revenues and royalties, decreased to US$164 per ounce for the year ended December 31, 2007 compared to US$201 per ounce in 2006. The decrease in unit cash costs was primarily due to the impact of increased production and improved pricing for by-products, partially offset by the strengthening Canadian dollar on both costs and by-product revenue realized.
Smelter treatment, refining and freight charges for the year ended December 31, 2007 of $22.4 million increased by $7.0 million (45%) compared to 2006. The increase is attributable to higher sales volumes ($2.1 million) and higher costs associated with the Company's new smelter agreement ($4.9 million) that came into effect April 1, 2007.
Non-cash amortization increased by $16.8 million (56%) to $46.9 million for the year ended December 31, 2007 compared to $30.1 million last year. The higher amortization is attributable to the 21% increase in palladium production ($3.8 million), the adjusted mine plan, effective from the fourth quarter of 2006, which resulted in an increase in the unit of production amortization rate ($9.1 million), and the inclusion of the amortization of the underground mine development costs for the first quarter of 2007 ($3.9 million), which commenced commercial production in April 2006.
The Company reviews and evaluates its long-lived assets for impairment annually. Impairment is considered to exist if total estimated future undiscounted cash flows are less than the carrying amount of the asset. During 2007, the Company engaged Scott Wilson RPA an independent geotechnical consulting company to complete a Mineral Resource and Mineral Reserve audit and to prepare an independent Technical NI 43-101 Report on the Lac des Iles mine as of June 2007. This was updated by a senior geologist with Lac des Iles Mines Ltd. (a qualified person) to December 31, 2007. As a result of these events the Company completed a detailed review of its life-of-mine operating plan for the Lac des Iles mine, the Company's only operating mine, and compared the carrying value of the Company's mining interests to the estimated recoverability.The Company's management believes an impairment charge and a corresponding reduction in the carrying value of its mining interests is not required. Assumptions underlying future cash flow estimates are subject to risk and uncertainty. Any differences between significant assumptions and market conditions such as metal prices, exchange rates, recoverable metal, and/or the Company's operating performance could have a material effect on the Company's ability to recover the carrying amounts of its long-lived assets resulting in possible impairment charges.
1
Non-GAAP measure. Reference should be made to footnote 1 at the end of this MD&A.
6

Administrative expenses for the year ended December 31, 2007 of $7.8 million increased by $1.1 million (15%) compared to 2006. The increase is due primarily to increased director's fees and expenses ($0.5 million), increased staff costs ($0.3 million) and higher capital taxes ($0.3 million).
Exploration expense for the year ended December 31, 2007 of $12.1 million was up $0.3 million (3%) compared to last year's expenditure of $11.8 million. Included in the 2007 expenditure is $5.9 million ($6.8 - 2006) spent on the APP as the Company continues its evaluation activities in Finland. Costs associated with the APP project are being charged to exploration expense as incurred until it is determined whether the project can be economically developed, at which time the costs will be capitalized. In addition, the Company continued its exploration of the OHGZ at the Lac des Iles mine. Diamond drilling commenced in the second quarter of 2007 and the goal of this program is to provide detailed information as to the metals distribution for the upper portion of the OHGZ.
Work continues on the Shebandowan West nickel-copper-PGM project and drill results from its Phase II drill campaign were announced in a press release on May 1, 2007. A technical report prepared in compliance with the requirements of National Instrument 43-101 disclosing the results of the mineral resource estimate was press released on October 26, 2007. On December 10, 2007, the Company announced that it has exercised its option to form an operating joint venture with Vale Inco Limited over the Shebandowan property.
Asset retirement costs for the year ended December 31, 2007 of $1.0 million compared to a charge of $0.6 million last year with the increase reflecting the increased palladium production.
For the year ended December 31, 2007, the result of the revenue and operating expense performance described above was a loss from mining operations of $19.4 million, an increase of $1.3 million (7%) compared to last year's loss of $18.1 million.
Other Income (Expenses)
For the year ended December 31, 2007, other income and expenses was a net expense of $10.2 million, down by $7.2 million compared to a net expense of $17.4 million last year. The decrease in 2007 is due mainly to a $8.4 million foreign exchange gain (2006 – $1.8 million foreign exchange loss), which relates primarily to the translation of the Company's US dollar denominated convertible notes and credit facilities, offset partially by a $3.0 million increase in interest and other financing charges. The increased interest and other financing charges are due primarily to a full year interest and accretion expense (increase of $3.1 million) relating to the convertible notes payable that were issued in March and June 2006.
Net Income (Loss)
For the year ended December 31, 2007, there was a tax recovery of $0.9 million (2006 recovery of $1.4 million). For the year ended December 31, 2007 the net loss was $28.7 million or $0.51 per share compared to a net loss of $34.1 million or $0.65 per share the previous year.
7

Summary of Quarterly Results

 	 	 	2006 *	 	 	2007	 	 	
	
(thousands of dollars
except per share
amounts)	 	 	Q1	 	 	Q2	 	 	Q3	 	 	Q4	 	 	Q1	*	 	Q2	 	 	Q3	 	 	Q4	 	 	
	
Revenue – before pricing adjustments	 	$	24,356	 	$	36,698	 	$	38,704	 	$	46,061	 	$	60,305	 	$	53,450	 	$	42,674	 	$	44,938	 	 	
Pricing adjustments:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Commodities	 	 	6,952	 	 	566	 	 	2,927	 	 	1,229	 	 	9,141	 	 	(2,421	)	 	237	 	 	1,799	 	 	
 	Foreign exchange	 	 	184	 	 	(1,745	)	 	(200	)	 	3,468	 	 	(1,007	)	 	(6,534	)	 	(6,419	)	 	(231	)	 	
	
Revenue – after pricing adjustments	 	$	31,492	 	$	35,519	 	$	41,431	 	$	50,758	 	$	68,439	 	$	44,495	 	$	36,492	 	$	46,506	 	 	
	
Cash flow from operations (1) , prior to changes in non-cash working capital**	 	 	(260	)	 	(965	)	 	2,716	 	 	8,421	 	 	23,037	 	 	12,865	 	 	4,068	 	 	6,858	 	 	
Exploration expense	 	 	2,024	 	 	2,659	 	 	2,576	 	 	4,572	 	 	3,228	 	 	798	 	 	2,933	 	 	5,179	 	 	
Net income (loss)	 	 	(4,141	)	 	(11,325	)	 	(11,247	)	 	(7,396	)	 	5,507	 	 	(9,066	)	 	(14,033	)	 	(11,088	)	 	
Net income (loss) per share	 	$	(0.08	)	$	(0.22	)	$	(0.21	)	$	(0.14	)	$	0.10	 	$	(0.17	)	$	(0.25	)	$	(0.19	)	 	
Fully diluted net income (loss) per share	 	$	(0.08	)	$	(0.22	)	$	(0.21	)	$	(0.14	)	$	0.10	 	$	(0.17	)	$	(0.25	)	$	(0.19	)	 	
	
*
Certain prior period amounts have been reclassified to conform to a classification adopted in the current period.

**
Includes exploration expense
FOURTH QUARTER
Fourth Quarter Highlights
•
Palladium production for the three months ended December 31, 2007 was 71,595 ounces, a decrease of 2% compared to the same period last year.

•
Revenue after pricing adjustments for the fourth quarter of 2007 of $46.5 million decreased $4.3 million (8%) compared to the same period last year.

•
Operating cash flow for the quarter (before changes in non-cash working capital) 1 declined by $1.5 million to $6.9 million compared to operating cash flow of $8.4 million in 2006.

•
The net loss for the three months ended December 31, 2007 was $11.1 million or $0.19 per share compared to a net loss of $7.4 million or $0.14 per share in the same period last year.

•
Palladium sales in the quarter were recorded at US$364 per ounce compared to US$322 per ounce in the comparable quarter last year, while by-product metal prices, with the exception of nickel, also realized considerable gains. Palladium accounted for 51% of the quarter's total revenues while platinum and nickel continued to be important sources of revenue, at 17% and 15% of the quarter's total revenue respectively.

•
Cash cost per ounce of palladium produced, 1 net of by-product metal revenues and royalties, was US$223 for the fourth quarter 2007 compared to US$108 in the same period last year, primarily due to the lower production in 2007 and the impact of the strengthening Canadian dollar on both costs and by-product revenue realized. 

1
Non-GAAP measure. Reference should be made to footnote 1 at the end of this MD&A.
8

Fourth Quarter Financial Results
Revenue
The Company earned revenue of $46.5 million for the three months ended December 31, 2007 compared to revenue of $50.8 million for the corresponding period in 2006. The loss from mining operations for the three months ended December 31, 2007 was $8.2 million, compared to income from mining operations of $0.5 million in the same period last year.
Revenue before pricing adjustments for the fourth quarter of 2007 decreased $1.1 million compared to the fourth quarter of 2006 and reflects a $7.0 million decrease due to a lower US$ exchange rate, offset partially by the net increase due to improved commodity prices and sales volumes of $5.9 million. Positive pricing adjustments from the mark-to-market of concentrate awaiting settlement in the fourth quarter of 2007 increased revenue in the quarter by $1.6 million ($1.8 million favourable commodity price adjustment offset partially by a $0.2 million negative foreign exchange adjustment). This compares to positive pricing adjustments in the fourth quarter of 2006 of $4.7 million ($3.5 million positive foreign exchange adjustment and a $1.2 million positive commodity price adjustment).
For the three months ended December 31, 2007, palladium sales were recorded at US$364 per ounce, up 13% compared to US$322 in the same period last year. Revenue from palladium sales before pricing adjustments in the fourth quarter of 2007 of $22.0 million increased by $0.5 million (2%) compared to the same period last year, but after pricing adjustments was lower by $0.4 million ($1.9 million negative foreign exchange adjustment offset partially by positive commodity price adjustments of $1.0 million).
Revenue from by-product metal sales after pricing adjustments in the three months ended December 31, 2007 decreased by $3.9 million (15%) to $22.7 million compared to $26.6 million in the same period last year.
Recorded Metal Prices and Average Exchange Rates

 	 	 	Q4 2007	 	 	Q4 2006	 	
	
Palladium – US$/oz	 	$	364	 	$	322	 	
Platinum – US$/oz	 	$	1,530	 	$	1,115	 	
Gold – US$/oz	 	$	836	 	$	635	 	
Nickel – US$/lb	 	$	11.70	 	$	15.11	 	
Copper – US$/lb	 	$	3.03	 	$	2.85	 	
US/CDN.$ exchange rate (Bank of Canada)	 	US$	1.02	 	US$	0.88	 	
	
Operations
During the three months ended December 31, 2007, the mill processed 1,165,769 tonnes of ore at an average of 12,671 tonnes per day, producing 71,595 ounces of palladium. During the same period in 2006, the mill processed 1,179,644 tonnes of ore at an average of 12,822 tonnes per day, producing 73,242 ounces of palladium. The average palladium head grade was 2.58 grams per tonne in the fourth quarter of 2007, compared to 2.52 grams per tonne in the corresponding period of 2006. In the fourth quarter of 2007, palladium recoveries were 75.2% as compared to 76.9% in fourth quarter of 2006, while mill availability in the period was 86.9% compared to 89.5% last year. The slight (2%) reduction in ounces produced in the fourth quarter of 2007 can be attributed to lower mill tonnage reflecting increased scheduled maintenance downtime in 2007 in order to reline the SAG and ball mills. The higher tonnage throughput for the year ended December 31, 2007 resulted in a rescheduling of planned maintenance activities.
During the three months ended December 31, 2007, 202,230 tonnes of ore were extracted from the Lac des Iles underground mine, with an average palladium grade of 5.98 grams per tonne, compared to 222,519 tonnes with an average palladium grade of 6.42 grams per tonne during the same period last year. In the Lac des Iles open pit operation for the three months ended December 31, 2007, 994,152 tonnes of ore were extracted with an average palladium grade of 1.92 grams per tonne compared
9

to 924,529 tonnes of ore extracted at an average palladium grade of 1.63 grams per tonne in the same period last year. Over this period, the strip ratio substantially improved to 1.74, compared to 2.13 in the same period for 2006.
Operating Expenses
Total production costs for the three months ended December 31, 2007 of $30.5 million reflected a $0.9 million (3%) increase over the $29.6 million in same period of 2006. Unit cash costs 1 to produce palladium (production costs including overhead and smelter treatment, refining and freight costs), net of by-product metal revenues and royalties, increased to US$223 per ounce in the fourth quarter of 2007 compared to US$108 per ounce in the corresponding period in 2006. The increase in unit cash costs was primarily due to the higher production costs, reduced nickel revenue (price per lb. US$11.70 in 2007 vs. US$15.11 in 2006) and the impact of the strengthening Canadian dollar on both costs and by-product revenue.
Smelter treatment, refining and freight charges for the three months ended December 31, 2007 of $5.9 million increased by $1.5 million (32%) compared to 2006. The increase is attributable to higher sales volumes ($0.4 million) and higher costs associated with the Company's new smelter agreement that came into effect on April 1, 2007 ($1.1 million.)
Non-cash amortization increased to $10.9 million in the fourth quarter of 2007 compared to $10.0 million in the corresponding period in 2006. The higher amortization is attributable to the adjustment in the mine plan that was effective from the fourth quarter of 2006, which resulted in an increase in the unit of production amortization rate.
Administrative expenses for the three months ended December 31, 2007 of $2.1 million increased by $0.6 million (37%) compared to 2006, as a result of higher staff costs.
Exploration expense was $5.2 million in the fourth quarter of 2007 compared to $4.6 million in the corresponding period last year, an increase of $0.6 million (13%). The increase is due mainly to the ongoing exploration at Shebandowan and the APP.
For the three months ended December 31, 2007, the loss from mining operations was $8.2 million, a decline of $8.7 million compared to last year's profit of $0.5 million, and reflects the revenue and operating expense issues described above.
Other Income (Expenses)
For the three months ended December 31, 2007, other income and expense was an expense of $2.9 million compared to an expense of $8.0 million in the corresponding period of 2006, a decrease of $5.1 million. The decrease in 2007 reflects a favourable foreign exchange impact compared to last year of $2.6 million, which relates primarily to the translation of the Company's US dollar denominated convertible notes and credit facilities, and a reduction of interest and other financing charges of $2.5 million. The reduced interest and other financing charges are due primarily to lower interest and accretion expenses of $2.1 million relating to the convertible notes payable and reflects the scheduled repayment of the notes.
Net Income (Loss)
The Company reported a net loss of $11.1 million or $0.19 per share compared to net loss of $7.4 million or $0.14 per share for the three months ended December 31, 2006.
1
Non-GAAP measure. Reference should be made to footnote 1 at the end of this MD&A.
10

LIQUIDITY
Sources and Uses of Cash

Year ended December 31	 	 	2007	 	 	2006	 	 	2005	 	 	
	
Cash generated (consumed) by operations before working capital changes	 	$	46,828	 	$	9,912	 	$	(36,460	)	 	
Changes in non-cash working capital	 	 	(21,352	)	 	(43,701	)	 	28,187	 	 	
	
Cash generated (consumed) by operations	 	 	25,476	 	 	(33,789	)	 	(8,273	)	 	
Cash provided (used) by financing	 	 	61,323	 	 	41,295	 	 	(7,051	)	 	
Cash used in investing	 	 	(15,346	)	 	(19,384	)	 	(35,400	)	 	
	
Increase (decrease) in cash and cash equivalents	 	$	71,453	 	$	(11,878	)	$	(50,724	)	 	
	
Cash provided by operations 1 (prior to changes in non-cash working capital) for the year ended December 31, 2007 was $46.8 million, compared to cash provided by operations of $9.9 million in 2006. The $36.9 million improvement was mainly attributable to increased non-cash amortization expense ($16.8 million), the impact of an unrealized foreign exchange loss ($11.6 million), a decreased net loss ($5.4 million) and a higher non-cash add back for accretion expense relating to the convertible notes payable ($2.9 million). For the year ended December 31, 2007, non-cash working capital required $21.4 million compared to $43.7 million in 2006, a reduction of $22.3 million. The higher non-cash working capital requirement in 2006 reflected the build up of concentrate awaiting settlement from increased production, which included the grade improvement from the commercial start up of the underground mine in April 2006. In 2007, while production continued to increase, this was partially offset by the lower foreign exchange rate.
Palladium awaiting settlement decreased to 125,802 ounces at December 31, 2007 compared to 129,496 ounces at December 31, 2006. The decrease in the physical quantities of metal in the concentrate awaiting settlement, combined with the higher prices used to value the concentrate awaiting settlement, offset by the strengthening Canadian dollar resulted in a $3.0 million (4%) decrease in the value of concentrate awaiting settlement as at December 31, 2007, compared to December 31, 2006. After allowing for non-cash working capital changes, cash provided by operations was $25.5 million for the year ended December 31, 2007 compared to cash usage of $33.8 million in 2006.
Financing activities for the year ended December 31, 2007 provided cash of $61.3 million and reflects equity financings of $75.3 million less the scheduled repayment of debt. On February 27, 2007, the Company completed a private placement of 550,000 flow-through common shares at $11.00 per share for gross proceeds of $6.0 million. These proceeds are being used to expedite work on the Shebandowan Project. In December 2007 the Company completed an equity offering of 18.7 million units at a price of US$4.00 per unit. In connection with the offering the company granted the underwriter's an over allotment option of 15% at the same price. This option was subsequently exercised in January 2008, increasing the gross proceeds of the offering to US$85.9 million.
The Company's total debt position reduced to $39.1 million at December, 2007 compared to $74.9 million at December 31, 2006. During 2007, five principal payments related to Tranche I convertible notes totaling US$17.5 million and three principal payments related to the Tranche II convertible note totaling US$4.5 million were made. At the noteholder's option, these payments were settled in a non-cash transaction by the issuance of 3,120,997 common shares which, in accordance with the terms of the convertible notes loan agreement, are valued at 90% of the five day volume weighted average price on the
1
Non-GAAP measure. Reference should be made to footnote 1 at the end of this MD&A.
11

AMEX exchange immediately prior to the payment date. As at December 31, 2007, US$26.5 million of principal amount of the convertible notes remained outstanding. The Company expects that the noteholders will continue to elect to receive interest and principal payments in common shares, however, should noteholders call for cash payments the Company has the right to defer payment of principal to the Series I and Series II note due dates of August 1, and December 1, 2008 respectively. The reduction in debt also includes scheduled long term debt repayments ($6.2 million), scheduled capital lease repayments ($2.0 million) and the repayment of the Kaiser-Francis Oil Company ("Kaiser-Francis") credit facility ($5.8 million) from the first advance under the Auramet palladium and platinum advance purchase agreement (see Capital Resources below).
In addition, the strengthening of the Canadian dollar resulted in an unrealized foreign exchange translation gain on US dollar denominated debt at December 31, 2007 of $8.4 million.
On October 12, 2006 the Company closed a transaction with Kaiser-Francis for a US$5.0 million short term working capital loan maturing December 31, 2006. The interest rate under the loan was the 30-day LIBOR plus 2.5% per annum. The Company paid a commitment fee of US$37,000 and amounts not drawn under the loan were subject to a standby fee of 0.125% per annum. In connection with the loan, the Company granted to Kaiser-Francis a first priority security interest on the inventory and receivables of the Company. On December 13, 2006 the maturity date was extended to March 31, 2007, with no other change in terms. The Company paid a commitment fee of US$25,000 for the extension. In accordance with the terms of the Auramet palladium and platinum advance purchase agreement, the first advance received from Auramet on March 7, 2007 was used to repay this loan to Kaiser-Francis.
Investing activities required $15.3 million of cash in 2007, the majority of which was attributable to the ongoing lateral development and sustaining capital for the underground mine ($9.2 million) and the 2007 expansion of the tailings management facilities ($4.3 million). This compares with $19.4 million of net investing activities last year, which was mainly related to the underground mine development and sustaining capital ($12.1 million) and the 2006 expansion of the tailings management facilities ($4.7 million).
CAPITAL RESOURCES
As at December 31, 2007 the Company had cash and cash equivalents of $74.6 million compared to $3.2 million at the same time last year.
To meet working capital requirements and lateral development of the underground mine, the Company entered into a palladium and platinum advance purchase facility with Auramet Trading, LLC on January 19, 2007 pursuant to which the Company may, at its election, receive advance payments not exceeding an aggregate maximum amount of US$25.0 million. The Company is required to pay a monthly commitment fee of 0.5% per annum, on the unused portion of the Auramet facility. As at December 31, 2007, the Company had no advances outstanding under this facility and the maximum amount of US$25.0 million was available. Under the current agreement with Auramet no advances can be received after June 2008 and any amounts advanced must be repaid by December 2008.
The Company anticipates that current capital resources are sufficient to meet the needs of the existing operations at the Lac des Iles mine as well as the development of the Shebandowan West project, Phase I of the OHGZ project and further evaluation of APP. The Company is currently pursuing options for the renewal or replacement of the Auramet working capital facility together with financing options to provide funding for the development of the APP project in Finland.
12

Contractual Obligations

As at December, 2007	 	 	 	 	 	Payments Due by Period	 	 	 	 	
(thousands of dollars)	 	 	Total	 	 	1 Year	 	 	2-3 Years	 	 	4-5 Years (2)	 	
	
Senior credit facility	 	$	9,875	 	$	5,918	 	$	3,957	 	$	–	 	
Capital lease obligations	 	 	3,496	 	 	1,672	 	 	1,824	 	 	–	 	
Convertible notes payable (1)	 	 	25,710	 	 	25,710	 	 	–	 	 	–	 	
Interest obligations	 	 	1,421	 	 	1,158	 	 	263	 	 	–	 	
Operating leases	 	 	3,257	 	 	1,224	 	 	2,008	 	 	25	 	
Other purchase obligations	 	 	10,808	 	 	10,808	 	 	–	 	 	–	 	
	
 	 	$	54,567	 	$	46,490	 	$	8,052	 	$	25	 	
	
1
To date noteholders have elected to receive principal and interest payments in common stock.

2
There are no payments due after five years.
RELATED PARTY TRANSACTIONS
On June 23, 2006, the Company repaid the balance of a US$20.0 million non-revolving credit facility that had been extended by Kaiser-Francis in December 2001 to finance the Company's working capital requirements. This facility bore interest based on the 30-day LIBOR plus 2.50% and was subject to a standby fee of 0.125% per annum. The amount paid to Kaiser-Francis for interest and standby fee on this facility in 2006 was $0.6 million. Repayment of this facility was made pursuant to the terms of the Series II convertible note issued on June 23, 2006.
On October 12, 2006 the Company closed a transaction with Kaiser-Francis for a US$5.0 million short term working capital loan maturing December 31, 2006. On December 13, 2006, the maturity date was extended to March 31, 2007. Interest on this new facility was based on the 30-day LIBOR plus 2.5% and the standby fee was 0.125% per annum. This facility was repaid on March 7, 2007. As of February 22, 2008 Kaiser-Francis reported that it held approximately 41% of the issued and outstanding common shares of the Company.
On December 13, 2007 the Company completed a public offering of 18,666,667 units at a price of US$4.00 per unit ($4.04 per unit) for total gross proceeds of approximately US$74.7 million. Each unit consisted of one common share and one half of a common share purchase warrant of the Company. Each whole warrant will entitle the holder to purchase one common share at a price of US$5.05 per share at any time on or prior to December 13, 2009. Pursuant to the terms of the securities purchase agreement dated March 24, 2006 between the Company, Kaiser-Francis and IP Synergy Finance Inc. ("IP Synergy") relating to the Company's convertible notes due 2008, Kaiser-Francis and IP Synergy each had a right to subscribe at the public offering price for up to 12.5% of the total securities being offered by the Company in this offering. If either Kaiser-Francis or IP Synergy subscribed for less than its 12.5% share, the unused right was to be offered to the non-declining party, Kaiser-Francis or IP Synergy, as the case may be. IP Synergy elected not to participate in this offering pursuant to its pre-existing participation right, and, in accordance with the terms of the securities purchase agreement, Kaiser-Francis elected to subscribe for 25% of this offering.
On January 9, 2008, the Company issued an additional 2,800,000 units under a 30-day overallotment option granted to the underwriters at an exercise at a price of US$4.00 per unit, for total gross proceeds of US$11.2 million. Kaiser-Francis also exercised its pre-existing right under the securities purchase agreement to subscribe for 25% of the overallotment units.
REVIEW OF OPERATIONS AND PROJECTS
Lac des Iles Property
The Lac des Iles mine consists of an open pit mine, an underground mine, a processing plant with a nominal capacity of approximately 15,000 tonnes per day, and the original mill (which is currently idle)
13

with a capacity of approximately 2,400 tonnes per day. The primary deposit on the property is the Roby Zone, a disseminated magmatic nickel-copper-PGM deposit.
Mining Operations
The Company began mining the Roby Zone in 1993 using open pit mining methods. Ore and waste from the open pit is mined using conventional hydraulic 27 cubic meter and 23 cubic meter shovels, 190 tonne trucks, 187 millimeter blast hole drills and a fleet of conventional ancillary equipment. Mine waste is stockpiled outside of design pit limits.
Development of the underground mine commenced in the second quarter of 2004 in order to access the higher grade portion of the Roby Zone. The underground deposit lies below the ultimate pit bottom of the open pit and extends to a depth of approximately 660 meters below the surface where it is truncated by an offset fault. Commercial production from the underground mine commenced on April 1, 2006. For the year ended December 31, 2007, the underground mine had an average head grade of 5.79 grams per tonne palladium compared to 5.96 grams per tonne in 2006.
The chosen mining method for the underground mine is sublevel retreat longitudinal longhole stoping with no fill. The mining block interval is 70 meters floor to floor including a 15 meter to 25 meter sill pillar below each haulage level. Stopes are 45 meters to 55 meters high by the width of the ore body. Total intake ventilation for the mine is designed to be 205 cubic meters per minute. There is one intake ventilation raise/secondary egress situated outside the ultimate open pit limits and air exhausts up the main ramp.
The open pit has a remaining mine life of less than two years at the current rate of production. In light of favourable PGM market conditions, management is currently assessing the economic viability of a southern extension of the open pit, which could prolong the mine life of the open pit by an additional two to three years. The Company is contemplating commencing production from the upper portion of the OHGZ as the current underground mine ceases operations.
Milling Operations
In 2001, a new concentrator facility was commissioned which utilizes a conventional flotation technology to produce a palladium rich concentrate that also contains platinum, nickel, gold and copper.
Ore is first crushed in a gyratory crusher and conveyed to a coarse ore stockpile. With the commissioning of the secondary crusher in 2004, the coarse ore stream can be split so that a portion is crushed in the secondary crusher producing a fine material feed which is then combined with the coarse feed. This mixture of coarse and fine material feeds to the SAG mill to increase mill throughput. In 2005, modifications were made to the secondary crusher, including the installation of a slide gate and better control feed distribution. The ore is ground to a nominal P80 (the size of an opening through which 80% of the product will pass) of 74 microns in a conventional semi-autogenous mill/ball mill/pebble crusher (SABC) circuit. The ground ore then feeds a flotation circuit that is comprised of rougher/scavengers and four stages of cleaning. The flotation circuit in the old concentrator is currently connected to the new concentrator to provide additional cleaner flotation capacity. The final concentrate is thickened and dewatered using two pressure filters.
In 2007, the concentrator processed 5,006,383 tonnes of ore or 13,716 tonnes per calendar day at an average palladium head grade of 2.39 grams per tonne and an average palladium recovery of 74.8%. In 2006, the concentrator processed 4,570,926 tonnes of ore or 12,523 tonnes per calendar day at an average palladium head grade of 2.18 grams per tonne and an average palladium recovery of 74.0%. In 2007, the Company produced 286,334 ounces of palladium compared to 237,338 ounces in 2006.
Production costs per tonne of ore milled were $24.98 in 2007 compared to $24.60 in 2006. Cash costs, which include direct and indirect operating costs, smelting, refining, transportation and sales costs and royalties, net of credits for by-products, were US$164 per ounce of palladium in 2007 as compared to US$201 per ounce of palladium in 2006
14

Offset High Grade Zone
The OHGZ is located on the Lac des Iles property and was discovered by the Company's exploration team in 2001. The OHGZ is believed to be the fault-displaced continuation of the Roby Zone mineralization and is located below and approximately 250 meters to the west of the Roby Zone. A mineral resource estimate prepared by Scott Wilson RPA in October 2007 estimated that the OHGZ has more than three times the mineral resources of the current underground mine at the Roby Zone at similar grades, while still being open along strike to the north, south and at depth.
From May to October 2007, the Company completed approximately 18,000 meters of infill drilling in the upper 300 meters of the OHGZ, with the objective of upgrading that portion of the mineral resources to the measured and indicated categories. The Company has begun to receive assay results and anticipates updating its mineral resources estimate for the OHGZ in the second quarter of 2008. The Company's objective is to commence production from the OHGZ as the current underground mine reaches the end of its mine life in 2010.
In September 2007, the Company engaged two consulting firms, Micon International Limited and Nordmin Engineering Ltd., to prepare a scoping study. The scoping study will examine the economic viability of several exploitation scenarios for the OHGZ, including a continuation of the ramp from the current underground mine and shaft options. A report on the results of this preliminary economic assessment is nearing completion and the Company anticipates releasing the results during the second quarter of 2008.
An exploration drilling program is also currently in progress to search for the deep limits of the OHGZ. To date, the OHGZ has been traced to a depth of 1,300 meters below surface, and along a strike length of approximately 600 meters.
Shebandowan West Project
On December 10, 2007, the Company earned a 50% interest in the former producing Shebandowan mine and the surrounding Haines and Conacher properties pursuant to an option and joint venture agreement with Vale Inco. In order to earn its 50% interest, the Company incurred $3.0 million in exploration expenditures and made $0.2 million in cash payments. The properties contain a series of nickel-copper-PGM mineralized bodies and the land package totals approximately 7,842 hectares. These properties are located 90 kilometers west of Thunder Bay, Ontario, and approximately 100 kilometers southwest from the Company's Lac des Iles mine. Vale Inco retains an option to increase its interest from 50% to 60%, exercisable in the event that a feasibility study on the properties results in a mineral reserve and mineral resource estimate of the equivalent of 200 million pounds of nickel and other metals. As currently envisaged, the Shebandowan West Project will not trigger Vale Inco's back-in right.
The Shebandowan West Project encompasses three shallow mineralized zones known as the West, Road and "D" zones, all of which are located at shallow depths immediately to the west of the former Shebandowan mine in an area known as the Shebandowan West district. The Shebandowan West Project's nickel-copper-PGM mineralization is believed by management to represent the western extension of the Shebandowan mine orebody. The former Shebandowan mine, which was in operation from 1972 to 1998, produced 8.7 million tonnes of ore at grades of 2.07% nickel, 1.00% copper and approximately 3.0 g/t PGM and gold.
Management is considering a mine development scenario that would entail excavation of the Shebandowan West Project by means of ramp-accessed underground mining methods at a rate of 500 to 1,000 tonnes per day, crushing the material on site and transporting it by truck to the Lac des Iles property for processing at the original mill on the Lac des Iles property. The original mill at Lac des Iles has been idle since 2001 and the Company believes that it could be refurbished quickly and at a relatively low cost. Preliminary metallurgical testing supports the possibility of producing a bulk sulphide concentrate from the Shebandowan West Project at the original mill.
15

A Technical Report in compliance with National instrument 43-101 disclosing the results of a mineral resource estimate by an independent Qualified Person was filed on October 26, 2007. In December 2007, the Company retained SRK Consulting to prepare a preliminary economic assessment of the ramp-accessed mine scenario. The results of this report are expected in the second quarter of 2008.
Community consultations and baseline environmental sampling are ongoing and completion of bulk sampling, process and design are expected to be completed during the first half of 2008. If plans proceed as expected, production at the Shebandowan West Project could commence in 2009.
Arctic Platinum Project
The Company is party to an agreement with Gold Fields entitling it to earn up to a 60% interest in a series of mining licenses and claims known as the APP. The agreement is subject to a back-in right in favor of Gold Fields which, if exercised, would decrease the Company's interest to a 50% share. Upon satisfaction of the earn-in requirements, North American Palladium will have a casting vote at meetings of the joint venture partners, other than with respect to matters requiring a special majority vote.
In order to exercise the option, on or before August 31, 2008, the Company must: (i) complete a re-scoping and exploration program; (ii) complete a feasibility study; (iii) make a production decision and prepare the initial formal development proposal and associated budget based on the feasibility study; (iv) incur expenditures of US$12.5 million on the APP; and (v) issue 7,381,636 Common Shares to Gold Fields BV in order to earn a 50% interest or 9,227,033 Common Shares to earn a 60% interest. To date, the Company has completed the re-scoping study, incurred over US$11.6 million in expenditures and has commissioned a feasibility study. The Company believes that it will satisfy the conditions of the earn-in on or before August 31, 2008.
The APP is an advanced-stage PGM-nickel-copper exploration project located approximately 60 kilometers south of the city of Rovaniemi, Finland. To date, three areas of the APP have been explored by North American Palladium: the Suhanko deposits, the Narkaus deposits and the Penikat deposits.
The Suhanko Deposits
The Suhanko deposits are located approximately 60 kilometers south of the city of Rovaniemi, which has a population of approximately 4,400 and, as the capital of the Province of Lapland, is a major regional centre. The town is serviced by rail, road and air with multiple flights daily to and from Helsinki. The port of Kemi on the Gulf of Bothnia is kept open throughout the winter and is located 120 kilometers southwest of Rovaniemi.
Suhanko is comprised of several deposits over a total strike length of approximately 17 kilometers that have been demonstrated by Gold Fields to contain a number of nickel-copper-PGM deposits. Since the discovery of nickel-copper-PGM mineralization at the Yli-Portimo deposit in 1964, exploration in the Suhanko project area in the intervening years has resulted in the discovery of the following other deposits: Konttijarvi, Little Suhanko, Vaaralampi, Niittilampi, Ahmavaara, Suhanko North, and Tuumasuo. Exploration and delineation work in connection with the Company's preparation of a feasibility study has focused on only the Konttijarvi and Ahmavaara deposits, with the total sizes of the remaining deposits being essentially undetermined.
The Narkaus Deposits
The Narkaus deposits are located approximately 30 kilometers northeast of the Suhanko deposits and contains a sequence of favorable rocks that have been demonstrated to be present along an aggregate strike length of approximately 20 kilometers. To date, significant nickel-copper-PGM mineralization has been discovered at a number of deposits, including the Siika-Kama, Kuohunki, Nutturalampi and Kilvenjärvi deposits. The Company continues to explore deposits in the Narkaus deposit area with a view to potentially improving the overall economics of the larger Suhanko deposit area.
16

The Penikat Deposits
The Penikat deposits are a separate intrusion located approximately 35 kilometers to the southwest of the Suhanko deposits. Traditional reef-style nickel-copper-PGM mineralization has been discovered in three distinct reefs over a strike length of approximately 27 kilometers. To date, exploration has concentrated on evaluating the shallow portions (essentially above a depth of 100 meters from surface) of one of these reefs where significant concentrations of nickel-copper-PGM mineralization located in the northern portion of the intrusion have been discovered. The exploration potential of the remaining two reefs, along with the depth extensions of the explored reef, remains essentially untested.
The Suhanko Deposits
Management has been examining a development scenario consisting of two nickel-copper-PGM open pit mines at two of the deposits that comprise the Suhanko area, the Ahmavaara and Konttijarvi deposits, which are located three kilometers from each other. The nickel-copper-PGM bearing material would be processed through a centrally-located concentrator at a nominal throughput rate of 5.0 million tonnes per year. PGM-nickel-copper bearing concentrate would be transported 125 kilometers by truck to a port facility located at Kemi, Finland and shipped to smelting and refining facilities for final extraction of the contained metals.
On October 30, 2007, the Company released the results of a scoping study by Aker Kvaerner on the two main mineral deposits in the Suhanko area, Ahmavaara and Konttijarvi, which indicated that the mineral resources could potentially support a 20-year mine life at approximately 7.5 million tonnes per annum. The Company has retained Aker Kvaerner to prepare a definitive feasibility study for the Suhanko project to build upon the recommendations in the scoping study. The Company has also contracted with a 30-year veteran of the mining industry to oversee the feasibility study and other work at the APP as the Company moves closer to satisfying its earn-in conditions.
An infill drilling campaign at the Ahmavaara deposit was completed earlier in 2007 and the assay results of the final 26 holes of the 83-hole drilling program were reported on October 22, 2007. Micon International Limited has now been engaged to conduct the update of the mineral resource estimates, which will include the results from the Ahmavaara infill drilling campaign. Micon will also conduct the open pit designs and optimization.
Bulk sampling of the Ahmavaara and Konttijarvi deposits was also completed in October 2007 in advance of pilot plant test work. A program of bench-scale metallurgical testing has been completed in support of a pilot plant test that commenced in December 2007 and was completed in February 2008. The pilot plant test provided samples that will be tested by smelters that have been identified for the concentrate marketing strategy and will allow the Company to pilot a flowsheet. In October 2007, the Company commenced discussions with various smelters, and follow-up meetings are planned now that samples are available. Initial smelting proposals in support of the feasibility study are anticipated by May 2008.
Grassroots Exploration Properties
In addition to its operating mine and three advanced exploration projects, the Company is constantly examining PGM and nickel opportunities, particularly in the areas surrounding the Company's Lac des Iles mine.
Management believes that the Company is well positioned to partner with other PGM and nickel exploration companies in Canada, given the existing infrastructure at the Lac des Iles mine and the Company's years of experience in mining PGM-nickel deposits. From time to time, the Company enters into confidentiality agreements with junior mining companies or individual prospectors to assess the prospective nature of their land holdings. In addition, management believes that the consolidation in the nickel industry may result in joint venture or acquisition opportunities for the Company as the major nickel companies seek to shed non-core assets.
17

The Company is also active in grassroots exploration and recently staked 39 claims containing 632 claim units at the Company's Shawmere Project, located approximately 110 kilometers southwest of Timmins, Ontario, Canada. The Company intends to conduct a grassroots exploration program to assess the area's potential for hosting PGM-nickel-copper mineralization similar to that found at its Lac des Iles mine.
Metal Sales
In 2007, the Company sold palladium both into the spot market and to Auramet Trading, LLC, a precious metals merchant ("Auramet"), under a palladium and platinum advance purchase facility that the Company entered into in January 2007. The facility provides for the sale, at the Company's option, of an average of 10,000 ounces of palladium and 500 ounces of platinum per month. Under the terms of the facility, the Company may receive advance payments not exceeding, at any time, an aggregate maximum of US$25 million. The purchase price may be fixed or provisional. For fixed pricing, the Company may price at either: (i) Auramet's current market bid price at the time of the transaction, or (ii) market limit orders, as defined under the terms of the agreement. In the case of provisional pricing, it is determined based on the afternoon fixing of the London Bullion Marketing Association immediately preceding the purchase. In each case, such pricing will reflect the forward value corresponding to the scheduled delivery date. Each advance payment is subject to a discount and, upon the delivery of the precious metals to Auramet, the Company is paid the difference between the advance payment and the purchase price. To secure the obligations of the Company under the agreement, the Company has granted to Auramet a security interest in the concentrates mined at the Lac des Iles mine, together with the proceeds arising from the sale of the concentrate, and, by way of security, an assignment of its smelting and refining agreement.
In 2006, all palladium production was sold into the spot market with one or more commodity dealers and manufacturers. From January 2000 to June 2005, the Company sold all of its palladium production to an automotive manufacturer under a contract with a US$325 per ounce floor price for 100% of its palladium production and a US$550 per ounce ceiling price on 50% of its palladium production.
For the year ended December 31, 2007, the Company recorded a weighted average cash price of US$356 per ounce on its physical deliveries of palladium into the spot market. The Company expects that palladium prices will continue to trade higher in 2008 than in 2007. The average spot price was US$360 per ounce for the fourth quarter of 2007 (reaching a high of US$379), compared to an average price of US$321 per ounce for same period last year. Since January 1, 2005, the price of palladium has shown strong growth as a result of strong demand, most notably in the automotive industry, as indicated in the chart below from Johnson Matthey.
18

Source: Johnson Matthey
MANAGEMENT'S OUTLOOK
There is no significant pattern of variability or seasonality affecting the Company's operations. The principal drivers of the Company's performance are its monthly production of PGM and by-product metals from its Lac des Iles mine, the corresponding world spot prices of such metals and the prevailing US$ exchange rate.
Production for the year ended December 31, 2007 was 286,334 ounces of palladium with an average palladium head grade of 2.39 grams per tonne, and represents a 21% increase over the previous year's production of 237,338 ounces, with a head grade of 2.18 grams per tonne. This continues the trend of improved volumes and head grade year over year reflecting the impact of the underground mine which has been in commercial production since the second quarter of last year. The Company's 2008 year end production target is approximately 300,000 ounces of palladium. The proportion of by-product metals produced is, in aggregate, expected to increase in tandem with palladium production.
The Company's intensive core exploration program will continue in 2008, with an important component being the continuation of activities on the APP in Finland. In addition, the Company continues to focus on the further definition of the OHGZ at Lac des Iles and the development of the Shebandowan West Project. A key strategy moving forward will be to continue the pursuit of opportunities to acquire good quality PGM-Ni-Cu projects.
Recorded Metal Prices

 	 	 	2005	 	 	2006	 	 	2007	 	 	YTD 2008 *	 	
	
Palladium – US$/oz	 	$	230	 	$	319	 	$	356	 	$	462	 	
Platinum – US$/oz	 	$	815	 	$	1,140	 	$	1,364	 	$	1,903	 	
Gold – US$/oz	 	$	442	 	$	610	 	$	726	 	$	941	 	
Nickel – US$/lb	 	$	6.60	 	$	11.68	 	$	15.58	 	$	13.18	 	
Copper – US$/lb	 	$	1.50	 	$	3.02	 	$	3.30	 	$	3.48	 	
	
*
Based on the average month end London Metal Exchange ("LME") afternoon price fix for the two months ended February 29, 2008.
19

The Company believes that the surplus pressures of the early 2000's have abated and that there is evidence to support the view that the palladium market is moving towards more of a demand-driven pricing environment. This is being evidenced by increasing global catalytic demand, fueled by growing low tolerance emission legislation, and technological advances which could exploit pricing differentials between palladium and platinum. Electrical power supply problems in South Africa that produces approximately 35% of the world's supply of palladium is another catalyst for higher palladium and platinum prices.
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)
Impairment assessments of long-lived assets
Each year, the Company reviews the mining plan for the remaining life of mine. Significant changes in the mine plan can occur as a result of mining experience, mineral reserve estimates based on assessed geological and engineering analysis, new discoveries, changes in mining methods and production rates, process changes, investments in new equipment and technology, metal prices, estimates of future production costs and other factors. Based on year-end mineral reserves and the current mine plan, the Company reviews annually its accounting estimates and makes adjustments accordingly.
The Company assesses long-lived assets for recoverability on an annual basis. When the carrying value of a long-lived asset is less than its net recoverable value, as determined on an undiscounted basis, an impairment loss is recognized to the extent that its fair value, measured as the discounted cash flows over the life of the asset.
Assumptions underlying future cash flow estimates are subject to risk and uncertainty. Any differences between significant assumptions and market conditions such as metal prices, exchange rates, recoverable metal, and/or the Company's operating performance could have a material effect on the Company's ability to recover the carrying amounts of its long-lived assets resulting in possible additional impairment charges.
(b)
Amortization of mining interests
The Company amortizes a large portion of its mining interests using the unit of production method based on proven and probable reserves to which they relate or on a straight-line basis over their estimated useful lives, ranging from three to seven years.
(c)
Revenue Recognition
Revenue from the sale of palladium and by-product metals is recognized net of royalties upon the delivery of concentrate to the smelter, which is when title transfers and the rights and obligations of ownership pass. The Company's metals are sold under contracts that provide for final prices that are determined by quoted market prices in a period subsequent to the date of sale. Variations from the provisionally priced sales are recognized as revenue adjustments as they occur until the price is finalized. Provisional pricing is based upon market prices in the month of recognition. Concentrate awaiting settlement at the smelter is net of estimated treatment and refining costs which are subject to final assay adjustments.
(d)
Mine Restoration Obligation
Asset retirement obligations are recognized when incurred and recorded as liabilities at fair value. The amount of the liability is subject to re-measurement at each reporting period. The liability is accreted over time through periodic charges to earnings. In addition, the asset retirement obligation is capitalized as part of mining interests and amortized over the estimated life of the mine. The estimated asset retirement obligation may change materially based on future changes in operations, costs of reclamation and closure activities, and regulatory requirements.
20

RECENT ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT YET ADOPTED
(a)
Financial Instruments – Recognition and Measurement
In December 2006, the CICA released new Handbook sections 3862, "Financial Instruments – Disclosures", and 3863, "Financial Instruments – Presentation", effective for fiscal years beginning on or after October 1, 2007. Section 3862, describes the required disclosures related to the significance of financial instruments on the Company's financial position and performance and the nature and extent of risks arising for financial instruments to which the entity is exposed and how the entity manages those risks. This section complements handbook sections 3855, "Financial Instruments – Recognition and Measurements"; 3863, "Financial Instruments – Presentation; and 3865, "Hedges". Section 3863, establishes standards for presentation of financial instruments and non financial derivatives. This section complements handbook section 3861, "Financial Instruments – Disclosure and Presentation". The Company has not yet determined the effect these new standards will have on its financial position and results of operations.
(b)
Capital Disclosures
In December 2006, the CICA released new Handbook section 1535, "Capital Disclosures", which establishes standards for disclosing information about a Company's capital and how it is managed, to enable users of financial statements to evaluate the Company's objectives, policies and procedures for managing capital. This section will apply to interim and annual financial statements relating to fiscal years beginning on or after January 1, 2008. The Company has not yet determined the effect these new standards will have on its financial position and results of operations.
(c)
Inventories
In June 2007, the CICA released new handbook section 3031, "Inventories," effective for interim and annual financial statements beginning on or after January 1, 2008. Section 3031 supersedes the existing CICA section 3030, "Inventories," and provides additional guidance on the determination of cost and its subsequent recognition as an expense, including any write-down to net realizable value, and disclosures made within the financial statements. The Company has not yet determined the effect these new standards will have on its financial position and results of operations.
OUTSTANDING SHARE DATA
As of March 18, 2008, there were 80,633,812 common shares of the Company outstanding and options outstanding pursuant to the 1995 Corporate Stock Option Plan entitling holders thereof to acquire 391,433 common shares of the Company at an average strike price of $9.82. As of the same date, there were also 12,724,202 warrants outstanding each warrant entitling the holder thereof to purchase one common share at an average strike price of US$5.81.
RISKS AND UNCERTAINTIES
The price of palladium is the most significant factor influencing the profitability of the Company. In the twelve months ended December 31, 2007, sales of palladium accounted for approximately 47% (December 31, 2006 – approximately 48%) of the Company's revenue. Many factors influence the price of palladium, including global supply and demand, speculative activities, international political and economic conditions and production levels and costs in other PGM producing countries, particularly Russia and South Africa. The possible development of a substitute alloy or synthetic material, which has catalytic characteristics similar to platinum group metals, may result in a future decrease in demand for palladium and platinum.
Currency fluctuations will affect financial results since the prices of the Company's products are denominated in United States dollars, whereas the Company's administration, operating and exploration expenses are incurred mainly in Canadian dollars. As a result, any strengthening of the Canadian dollar relative to the United States dollar has a negative impact on the Company's revenue and profitability.
The Company is dependent on one mine for its metal production. The business of mining is generally subject to risks and hazards, including environmental hazards, industrial accidents, metallurgical and
21

other processing problems, unusual and unexpected rock formations, pit slope failures, flooding and periodic interruptions due to inclement weather conditions or other acts of nature, mechanical equipment and facility performance problems and the availability of materials and equipment. These risks could result in damage to, or destruction of, the Company's properties or production facilities, personal injury or death, environmental damage, delays in mining, monetary losses and possible legal liability. Although the Company maintains insurance in respect of the mining operations that is within ranges of coverage consistent with industry practice, such insurance may not provide coverage of all the risks associated with mining. Currently the Company sells all of its concentrate to one smelting firm under a contract that was renegotiated during the second quarter of 2007 for a three year term that expires on March 31, 2010. This agreement may be extended on an annual basis for an additional two years by mutual agreement of both parties if such agreement is reached no later than six months prior to the anniversary date of March 31, 2010.
DISCLOSURE CONTROLS AND PROCEDURES
Management is responsible for the information disclosed in this management's discussion and analysis 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 twelve months ended December 31, 2007, the President and Chief Executive Officer and Vice President, Finance 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 President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer. Based on that evaluation, the President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective as of December 31, 2007.
INTERNAL CONTROL OVER FINANCIAL REPORTING
For the year ended December 31, 2007, the President and Chief Executive Officer and Vice President, Finance 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 Canadian GAAP and including a reconciliation to U.S. GAAP.
There have been no changes in the Company's internal controls over the financial reporting that occurred during the most recent interim period ended December 31, 2007 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 with respect to the preparation and fair presentation of published financial statements. Under the supervision and with the participation of the President and Chief Executive Officer and the Vice President, Finance and Chief Financial Officer, management conducted an 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. Based on that evaluation, the President and Chief Executive Officer and Vice President, Finance and Chief Financial Officer concluded that the design and operation of these internal controls over financial reporting were effective as at December 31, 2007.
22

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 Canadian securities regulators and the United States Securities and Exchange Commission, 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 or Form 40-F can be obtained from the United States Securities and Exchange Commission's website at www.sec.gov.
1  Non-GAAP Measures
This management's discussion and analysis refers to cash cost per ounce and operating cash flow which are not recognized measures under Canadian GAAP. Such non-GAAP financial measures do not have any standardized meaning prescribed by Canadian GAAP 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 for the current period and are a better indication 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 Canadian GAAP. The following tables reconcile these non-GAAP measures to the most directly comparable Canadian GAAP measure:
(a)
Reconciliation of Cash Cost per Ounce to Financial Statements

 	 	 	Three months ended	 	 	Twelve months ended	 	 	
(thousands of dollars	 	 	December 31	 	 	December 31	 	 	
except per ounce amounts)	 	 	2007	 	 	2006	 	 	2007	 	 	2006	 	 	
	
Production costs including overhead	 	$	30,530	 	$	29,553	 	$	125,065	 	$	112,458	 	 	
Smelter treatment, refining and freight costs	 	 	5,939	 	 	4,487	 	 	22,444	 	 	15,438	 	 	
	
 	 	 	36,469	 	 	34,040	 	 	147,509	 	 	127,896	 	 	
Less by-product metal revenue	 	 	(22,701	)	 	(26,574	)	 	(104,126	)	 	(83,556	)	 	
	
 	 	 	13,768	 	 	7,466	 	 	43,383	 	 	44,340	 	 	
	
Divided by ounces of palladium	 	 	62,446	 	 	59,333	 	 	251,531	 	 	193,067	 	 	
Cash cost per ounce (C$)	 	 	220	 	 	126	 	 	172	 	 	230	 	 	
C$ exchange rate	 	 	0.988	 	 	1.165	 	 	1.050	 	 	1.141	 	 	
	
Cash cost per ounce (US$)	 	$	223	 	$	108	 	$	164	 	$	201	 	 	
	
(b)
Reconciliation of Cash Flow from Operations, Prior to Changes in Non-Cash Working Capital (Operating Cash Flow) to Financial Statements*

 	 	 	Three months ended
December 31	 	 	Twelve months ended
December 31	 	 	
 	 	 	2007	 	 	2006	 	 	2007	 	 	2006	 	 	
	
Operating cash flow	 	$	6,858	 	$	8,421	 	$	46,828	 	$	9,912	 	 	
Changes in non-cash working capital	 	 	3,663	 	 	(13,995	)	 	(21,352	)	 	(43,701	)	 	
	
Cash provided by operating activities	 	$	10,521	 	$	(5,574	)	$	25,476	 	$	(33,789	)	 	
	
*
Certain prior period amounts have been reclassified to conform to the classification adopted in the current period
23

CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION
Certain information included in this MD&A, including any information as to our future financial or operating performance and other statements that express management's expectations or estimates of future performance, constitute '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. The words 'expect', 'believe', 'will', 'intend', 'estimate' and similar expressions identify forward-looking statements. Forward-looking statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable by management, are inherently subject to significant business, economic and competitive uncertainties and contingencies. These statements are based on certain factors and assumptions, including but not limited to, the assumption that market fundamentals will result in increased palladium demand and prices and sustained by-product metal demand and prices; the integrated operation of the Company's underground mine and the open pit mine remain viable operationally and economically; financing is available on reasonable terms; expectations for blended mill feed head grade and mill performance will proceed as expected; new mine plan scenarios will be viable operationally and economically; and plans for mill production, sustainable recoveries from the Lac des Iles mine, exploration at Lac des Iles and elsewhere will all proceed as expected.
The Company cautions the reader that such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual financial results, performance or achievements of North American Palladium to be materially different from the Company's estimated future results, performance or achievements expressed or implied by those forward-looking statements and that the forward-looking statements are not guarantees of future performance. These risks, uncertainties and other factors include, but are not limited to: metal price volatility; economic and political events affecting metal supply and demand; changes in the regulatory environment; fluctuations in ore grade or ore tonnes milled; geological, technical, mining or processing problems; future production; changes in the life-of-mine plan or the ultimate pit design; availability and increasing costs associated with mining inputs and labour; the speculative nature of exploration and development, including the risks of diminishing quantities or grades of mineral reserves; adverse changes in our credit rating; and the risks involved in the exploration, development and mining business. These factors are discussed in greater detail in the Company's most recent Form 40-F/Annual Information Form on file with the U.S. Securities and Exchange Commission and Canadian provincial securities regulatory authorities. 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 required by law. Readers are cautioned not to put undue reliance on these forward-looking statements.
24

Management's Responsibility
for Financial Statements
The accompanying consolidated financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles (GAAP). Financial statements include certain amounts based on estimates and judgments. When an alternative method exists under Canadian GAAP, 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 Canadian generally accepted accounting principles. 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
March 18, 2008

 		
James D. Excell 
President and CEO	 	G. Fraser B. Sinclair 
Vice President Finance, and CFO	
25

Auditors' Report
To the Shareholders of North American Palladium Ltd.
We have audited the consolidated balance sheets of North American Palladium Ltd. ("the Company") as at December 31, 2007 and 2006 and the consolidated statements of operations, comprehensive loss and deficit, cash flows and shareholders' equity for each of the years in the three-year period ended December 31, 2007. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. With respect to the consolidated financial statements for the year ended December 31, 2007, we also conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2007 and 2006 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2007 in accordance with Canadian generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 18, 2008 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
KPMG LLP
Chartered Accountants, Licensed Public Accountants
Toronto, Canada,
March 18, 2008.
26

Consolidated Balance Sheets
 (expressed in thousands of Canadian dollars)

 	 	
December 31	 	 	
 	 	2007	 	 	2006	 	 	
	
ASSETS	 	 	 	 	 	 	 	
Current Assets	 	 	 	 	 	 	 	
Cash and cash equivalents	$	74,606	 	$	3,153	 	 	
Concentrate awaiting settlement, net – Note 3	 	79,087	 	 	82,050	 	 	
Taxes recoverable	 	62	 	 	145	 	 	
Inventories – Note 4	 	17,873	 	 	14,164	 	 	
Crushed and broken ore stockpiles	 	8,072	 	 	7,134	 	 	
Other assets	 	2,563	 	 	2,602	 	 	
	
 	 	182,263	 	 	109,248	 	 	
Mining interests, net – Note 5	 	114,464	 	 	146,617	 	 	
Mine restoration deposit – Note 6	 	8,272	 	 	8,041	 	 	
Crushed and broken ore stockpiles	 	375	 	 	289	 	 	
Deferred financing costs – Note 7	 	–	 	 	962	 	 	
	
 	$	305,374	 	$	265,157	 	 	

LIABILITIES AND SHAREHOLDERS' EQUITY	

 	

 	
 	
Current Liabilities	 	 	 	 	 	 	 	
Accounts payable and accrued liabilities	$	20,757	 	$	21,526	 	 	
Future mining tax liability – Note 19	 	168	 	 	149	 	 	
Current portion of obligations under capital leases – Note 8	 	1,672	 	 	2,104	 	 	
Current portion of convertible notes payable – Note 9	 	25,710	 	 	22,148	 	 	
Current portion of long-term debt – Note 10	 	5,918	 	 	6,662	 	 	
Kaiser-Francis credit facility – Note 11	 	–	 	 	5,827	 	 	
	
 	 	54,225	 	 	58,416	 	 	
Mine restoration obligation – Note 2	 	8,878	 	 	8,211	 	 	
Obligations under capital leases – Note 8	 	1,824	 	 	4,111	 	 	
Convertible notes payable – Note 9	 	–	 	 	23,062	 	 	
Long-term debt – Note 10	 	3,957	 	 	10,992	 	 	
Future mining tax liability – Note 19	 	539	 	 	381	 	 	
	
 	 	69,423	 	 	105,173	 	 	
Shareholders' Equity	 	 	 	 	 	 	 	
Common share capital and purchase warrants – Note 13	 	443,986	 	 	339,743	 	 	
Stock options	 	1,673	 	 	1,269	 	 	
Equity component of convertible notes payable, net of issue costs – Note 9	 	6,044	 	 	12,336	 	 	
Contributed surplus	 	6,292	 	 	–	 	 	
Deficit	 	(222,044	)	 	(193,364	)	 	
	
Total shareholders' equity	 	235,951	 	 	159,984	 	 	
	
 	$	305,374	 	$	265,157	 	 	
	
Commitments – Notes 1 and 15
Contingencies – Note 6 and 18
Subsequent events – Note 21
See accompanying notes to the consolidated financial statements
On Behalf of the Board

 		
André J. Douchane 
Director	 	Gregory J. Van Staveren 
Director	
27

Consolidated Statements of Operations,
Comprehensive Loss and Deficit
 (expressed in thousands of Canadian dollars, except share and per share amounts)

 	 	
Year ended December 31	 	 	
 	 	2007	 	 	2006	 	 	2005	 	 	
	
Revenue – before pricing adjustments	$	201,367	 	$	145,819	 	$	85,233	 	 	
Pricing adjustments:	 	 	 	 	 	 	 	 	 	 	
 	Commodities	 	8,756	 	 	11,674	 	 	7,727	 	 	
 	Foreign exchange	 	(14,191	)	 	1,707	 	 	(354	)	 	
	
Revenue – after pricing adjustments –  Note 16	 	195,932	 	 	159,200	 	 	92,606	 	 	

Operating expenses	

 	

 	

 	
 	
Production costs, excluding amortization and asset retirement costs	 	125,065	 	 	112,458	 	 	99,322	 	 	
Smelter treatment, refining and freight costs	 	22,444	 	 	15,438	 	 	15,777	 	 	
Amortization – Note 5(b)	 	46,908	 	 	30,103	 	 	18,297	 	 	
Administrative	 	7,773	 	 	6,734	 	 	6,616	 	 	
Exploration	 	12,138	 	 	11,831	 	 	7,927	 	 	
Loss on disposal of equipment	 	–	 	 	194	 	 	–	 	 	
Asset retirement costs	 	1,010	 	 	554	 	 	476	 	 	
	
Total operating expenses	 	215,338	 	 	177,312	 	 	148,415	 	 	
	
Loss from mining operations	 	(19,406	)	 	(18,112	)	 	(55,809	)	 	

Other income (expenses)	

 	

 	

 	
 	
Interest and other financing costs – Note 17	 	(18,633	)	 	(15,647	)	 	(952	)	 	
Foreign exchange gain (loss)	 	8,422	 	 	(1,759	)	 	268	 	 	
	
Total other income (expenses)	 	(10,211	)	 	(17,406	)	 	(684	)	 	
	
Loss before taxes	 	(29,617	)	 	(35,518	)	 	(56,493	)	 	
Income and mining tax recovery – Note 19	 	(937	)	 	(1,409	)	 	(2,882	)	 	
	
Net loss and comprehensive loss for the year	 	(28,680	)	 	(34,109	)	 	(53,611	)	 	
Deficit, beginning of year	 	(193,364	)	 	(159,255	)	 	(105,644	)	 	
	
Deficit, end of year	$	(222,044	)	$	(193,364	)	$	(159,255	)	 	
	
Net loss per share	 	 	 	 	 	 	 	 	 	 	
 	Basic	$	(0.51	)	$	(0.65	)	$	(1.03	)	 	
	
 	Diluted – Note 13(f)	$	(0.51	)	$	(0.65	)	$	(1.03	)	 	
	
Weighted average number of shares outstanding – basic	 	55,792,203	 	 	52,562,939	 	 	52,006,548	 	 	
	
Weighted average number of shares outstanding – diluted – Note 13(f)	 	55,792,203	 	 	52,562,939	 	 	52,006,548	 	 	
	
See accompanying notes to the consolidated financial statements
28

Consolidated Statements of Cash Flows
 (expressed in thousands of Canadian dollars)

 	 	 	Year ended December 31	 	 	
 	 	 	2007	 	 	2006	 	 	2005	 	 	
	
Cash provided by (used in)	 	 	 	 	 	 	 	 	 	 	 	
Operations	 	 	 	 	 	 	 	 	 	 	 	
Net loss for the year	 	$	(28,680	)	$	(34,109	)	$	(53,611	)	 	
Operating items not involving cash	 	 	 	 	 	 	 	 	 	 	 	
 	Accretion expense relating to convertible notes payable	 	 	12,947	 	 	10,090	 	 	–	 	 	
 	Amortization	 	 	46,908	 	 	30,103	 	 	18,297	 	 	
 	Amortization of deferred financing costs	 	 	751	 	 	1,090	 	 	43	 	 	
 	Interest on convertible notes settled in shares	 	 	2,644	 	 	1,974	 	 	–	 	 	
 	Accrued interest on mine restoration deposit	 	 	(231	)	 	(194	)	 	(74	)	 	
 	Unrealized foreign exchange loss (gain)	 	 	10,779	 	 	(822	)	 	(33	)	 	
 	Asset retirement costs	 	 	1,010	 	 	554	 	 	476	 	 	
 	Future income tax recovery – Note 19	 	 	(937	)	 	(739	)	 	(3,286	)	 	
 	Stock based compensation and employee benefits	 	 	1,637	 	 	1,771	 	 	1,728	 	 	
 	Loss on disposal of equipment	 	 	–	 	 	194	 	 	–	 	 	
	
 	 	 	46,828	 	 	9,912	 	 	(36,460	)	 	
Changes in non-cash working capital – Note 20(a)	 	 	(21,352	)	 	(43,701	)	 	28,187	 	 	
	
 	 	 	25,476	 	 	(33,789	)	 	(8,273	)	 	

Financing Activities	

 	

 	

 	

Issuance of common shares and warrants, net of issue costs – Note 13	 	 	75,318	 	 	3,955	 	 	3,200	 	 	
Repayment of long-term debt	 	 	(12,016	)	 	(6,566	)	 	(6,798	)	 	
Repayment of obligations under capital leases	 	 	(1,979	)	 	(2,278	)	 	(2,253	)	 	
Mine restoration deposit	 	 	–	 	 	(600	)	 	(1,200	)	 	
Issuance of convertible notes	 	 	–	 	 	41,037	 	 	–	 	 	
Increase in long-term debt and credit facility	 	 	–	 	 	8,111	 	 	–	 	 	
Deferred financing costs	 	 	–	 	 	(2,364	)	 	–	 	 	
	
 	 	 	61,323	 	 	41,295	 	 	(7,051	)	 	

Investing Activities	

 	

 	

 	

Additions to mining interests	 	 	(15,346	)	 	(19,384	)	 	(35,415	)	 	
Proceeds on disposal of mining interests	 	 	–	 	 	–	 	 	15	 	 	
	
 	 	 	(15,346	)	 	(19,384	)	 	(35,400	)	 	
	
Increase (decrease) in cash and cash equivalents	 	 	71,453	 	 	(11,878	)	 	(50,724	)	 	
Cash and cash equivalents, beginning of year	 	 	3,153	 	 	15,031	 	 	65,755	 	 	
	
Cash and cash equivalents, end of year	 	$	74,606	 	$	3,153	 	$	15,031	 	 	

Cash and cash equivalents consisting of:	

 	

 	

 	

Cash	 	$	4,444	 	$	3,153	 	$	15,031	 	 	
Short-term investments	 	 	70,162	 	 	–	 	 	–	 	 	
	
 	 	$	74,606	 	$	3,153	 	$	15,031	 	 	
	
Supplementary information – Note 20(b), (c) (d) and (e)
See accompanying notes to the consolidated financial statements
29

Consolidated Statements
of Shareholders' Equity
 (expressed in thousands of Canadian dollars, except share amounts)

 	 	Number
of shares	 	 	Capital
stock	 	 	Stock
options	 	 	Warrants	 	 	Equity
component
of
convertible
notes
payable	 	 	Contributed
surplus	 	 	Deficit	 	 	Total
shareholders'
equity	 	 	
	
Balance, December 31, 2006	 	52,947,693	 	$	331,705	 	$	1,269	 	$	8,038	 	$	12,336	 	$	–	 	$	(193,364	)	$	159,984	 	 	
Common shares issued:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	For principal repayments on convertible notes payable	 	3,120,997	 	 	26,180	 	 	–	 	 	–	 	 	(6,292	)	 	6,292	 	 	–	 	 	26,180	 	 	
 	For interest payments on convertible notes payable	 	341,528	 	 	2,644	 	 	–	 	 	–	 	 	–	 	 	–	 	 	–	 	 	2,644	 	 	
 	Private placement of flow-through shares (net)	 	550,000	 	 	5,686	 	 	–	 	 	–	 	 	–	 	 	–	 	 	–	 	 	5,686	 	 	
 	Tax effect of flow-through shares	 	–	 	 	(1,114	)	 	–	 	 	–	 	 	–	 	 	–	 	 	–	 	 	(1,114	)	 	
 	Pursuant to unit offering, net of issue costs	 	18,666,667	 	 	64,461	 	 	–	 	 	–	 	 	–	 	 	–	 	 	–	 	 	64,461	 	 	
Warrants Issued:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Pursuant to unit offering, net of issue costs	 	–	 	 	–	 	 	–	 	 	5,155	 	 	–	 	 	–	 	 	–	 	 	5,155	 	 	
Stock options exercised	 	5,000	 	 	17	 	 	–	 	 	–	 	 	–	 	 	–	 	 	–	 	 	17	 	 	
Fair value of stock options exercised	 	–	 	 	10	 	 	(10	)	 	–	 	 	–	 	 	–	 	 	–	 	 	–	 	 	
Stock-based compensation expense	 	138,685	 	 	1,204	 	 	414	 	 	–	 	 	–	 	 	–	 	 	–	 	 	1,618	 	 	
Net loss for the year ended December 31, 2007	 	–	 	 	–	 	 	–	 	 	–	 	 	–	 	 	–	 	 	(28,680	)	 	(28,680	)	 	
	
Balance, December 31, 2007	 	75,770,570	 	$	430,793	 	$	1,673	 	$	13,193	 	$	6,044	 	$	6,292	 	$	(222,044	)	$	235,951	 	 	
	
See accompanying notes to consolidated financial statements.
30

Consolidated Statements
of Shareholders' Equity
 (expressed in thousands of Canadian dollars, except share amounts)

 	 	Number
of shares	 	 	Capital
stock	 	 	Stock
options	 	 	Warrants	 	 	Equity
component
of
convertible
notes
payable	 	 	Contributed
surplus	 	 	Deficit	 	 	Total
shareholders'
equity	 	 	
	
Balance, December 31, 2005	 	52,197,217	 	$	325,592	 	$	874	 	$	–	 	$	–	 	$	–	 	$	(159,255	)	$	167,211	 	 	
Common shares issued:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	For interest payments on convertible notes payable	 	242,158	 	 	1,974	 	 	–	 	 	–	 	 	–	 	 	–	 	 	–	 	 	1,974	 	 	
 	Private placement shares (net)	 	270,000	 	 	3,045	 	 	–	 	 	–	 	 	–	 	 	–	 	 	–	 	 	3,045	 	 	
 	Tax effect of flow-through shares	 	–	 	 	(1,067	)	 	–	 	 	–	 	 	–	 	 	–	 	 	–	 	 	(1,067	)	 	
Warrants Issued:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Pursuant to terms of Series I convertible notes, net of issue costs	 	–	 	 	–	 	 	–	 	 	6,238	 	 	9,750	 	 	–	 	 	–	 	 	15,988	 	 	
 	Pursuant to terms of Series II convertible note, net of issue costs	 	–	 	 	–	 	 	–	 	 	1,800	 	 	2,586	 	 	–	 	 	–	 	 	4,386	 	 	
Warrants exercised	 	–	 	 	–	 	 	–	 	 	–	 	 	–	 	 	–	 	 	–	 	 	–	 	 	
Stock options exercised	 	130,755	 	 	910	 	 	–	 	 	–	 	 	–	 	 	–	 	 	–	 	 	910	 	 	
Fair value of stock options exercised	 	–	 	 	166	 	 	(166	)	 	–	 	 	–	 	 	–	 	 	–	 	 	–	 	 	
Stock-based compensation expense	 	107,563	 	 	1,085	 	 	561	 	 	–	 	 	–	 	 	–	 	 	–	 	 	1,646	 	 	
Net loss for the year ended December 31, 2006	 	–	 	 	–	 	 	–	 	 	–	 	 	–	 	 	–	 	 	(34,109	)	 	(34,109	)	 	
	
Balance, December 31, 2006	 	52,947,693	 	$	331,705	 	$	1,269	 	$	8,038	 	$	12,336	 	$	–	 	$	(193,364	)	$	159,984	 	 	
	
See accompanying notes to consolidated financial statements.
31

Notes to the Consolidated Financial Statements
 for the years ended December 31, 2007, 2006 and 2005
 (expressed in thousands of Canadian dollars, except per share amounts and metal prices)
1.  NATURE OF OPERATIONS
North American Palladium Ltd. ("NAP" or "the Company") is a Canadian company in the business of exploring and mining Platinum Group Metals ("PGMs") and certain base and precious metals. Its principal asset is the Lac des Iles mine located in the Thunder Bay District in Ontario. The Company also has a number of base metal exploration projects located in Canada and an advanced PGM exploration project located in Finland in which it is earning an interest in under an agreement signed on March 24, 2006. The Company operates in one operating segment, mining.
The Company's financial position and operating results are directly affected by the market price of the PGMs in relation to the Company's production costs. The prices of PGMs (palladium, platinum) and by-product metals (gold, copper and nickel) fluctuate widely and are affected by numerous factors beyond the Company's control.
Arctic Platinum Project
On March 24, 2006, the Company entered into an agreement with Gold Fields Limited to further explore and develop a mining operation at the Arctic Platinum Project ("APP") located in Finland. The APP includes several advanced stage PGM Projects. The Company has been granted an option to earn up to a 50% interest and, in certain circumstances, a 60% interest in APP, in which event a joint venture will be formed and the Company will become the project operator. In order to exercise the option, the Company must spend US$12,500, complete a feasibility study and make a production decision as well as issue to Gold Fields, approximately 7.3 million shares or approximately 9.2 million shares, subject to adjustment, to earn a 50% or 60% interest respectively on or before August 31, 2008. As at December 31, 2007, the Company has incurred $12,758 (US$11,670) in expenditures on the APP and these costs have been charged to exploration expense.
Shebandowan Project
On December 3, 2003, the Company entered into an option and joint venture agreement with Vale Inco Limited (formerly Inco Limited and CVRD Inco Limited) on the Haines-Conacher property which surrounds the past producing Shebandowan mine. The agreement was subsequently amended on March 31, 2006 to include the mine. The nickel, copper and PGM Shebandowan Project is located approximately 100 km southwest of the Lac des Iles mine. Successive diamond drilling programs in 2005 and 2006 were carried out on three relatively shallow mineralized zones known as the West, Road and "D" zones. A Technical Report in compliance with National instrument 43-101 on Shebandowan West zone, disclosing the results of a mineral resource estimate by an independent Qualified Person was filed on October 26, 2007. On December 10, 2007, the Company announced that it has exercised its option to form an operating joint venture with Vale Inco Limited over the Shebandowan property.
2.  BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles. All amounts are in Canadian dollars unless otherwise noted. The more significant accounting policies are summarized as follows:
Basis of Consolidation
These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Lac des Iles Mines Ltd. ("LDI"), North American Palladium Finland Ltd. ("NAPFL"), and North American Palladium Arctic Services Ltd. ("NAPFS"). The Company's exploration activities in respect of the Shebandowan project are conducted through a joint venture, effective December 6, 2007, which the Company accounts for using the proportionate consolidation method. All inter-company balances and transactions have been eliminated.
32

Revenue and Concentrate Awaiting Settlement
Revenue from the sale of palladium and by-product metals is recognized net of royalties upon the delivery of concentrate to the smelter, which is when title transfers and the rights and obligations of ownership pass. The Company's metals are sold under contracts that provide for final prices that are determined by quoted market prices in a period subsequent to the date of sale. Variations from the provisionally priced sales are recognized as revenue adjustments as they occur until the price is finalized. Provisional pricing is based upon market prices in the month of recognition. Concentrate awaiting settlement at the smelter is net of estimated treatment and refining costs which are subject to final assay adjustments.
Although the Company sold its metals during 2007 to a limited number of customers, it is not economically dependent upon them as there are other markets throughout the world for the Company's metals.
Concentrate, Crushed and Broken Ore Stockpiles and Supplies Inventories
Concentrate and crushed and broken ore stockpiles are valued at the lower of average production cost (including an allocation of the amortization 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. Stockpile tonnages are verified by periodic surveys. The amount of stockpiled ore that is not expected to be processed within one year is shown as a long-term asset. Supplies inventory is valued at the lower of average direct acquisition cost and replacement cost.
Mining Interests
Plant and equipment are recorded at cost with amortization generally provided either on the unit-of-production method over the proven and probable reserves to which they relate or on a straight-line basis over their estimated useful lives, ranging from three to seven years. The Company capitalizes interest on major projects where direct indebtedness has occurred. During 2007 interest in the amount of $nil was capitalized (2006 – $188).
The Company leases certain equipment under capital leases. These leases are capitalized based on the lower of fair market value and the present value of future minimum lease payments. The corresponding liabilities are recorded as obligations under capital leases. This equipment is being amortized on the same basis as described above.
Mining leases and claims and royalty interests are recorded at cost and are amortized on the unit-of-production method over the proven and probable reserves.
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 established proven and probable reserves, future development and exploration expenditures are capitalized. Determination as to reserve potential is based on the results of feasibility 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.
Impairment of Long-lived Assets
Each year, the Company reviews mining plans for the remaining life of each property. Significant changes in the mine plan can occur as a result of mining experience, new discoveries, changes in mining methods and rates, process changes, investments in new equipment and technology and other factors. Based on year-end ore reserves and the current mine plan, the Company reviews annually its accounting estimates and makes adjustments accordingly.
33

The Company assesses long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. When the carrying value of a long-lived asset is less than its net recoverable value as determined on an undiscounted basis, an impairment loss is recognized to the extent that its fair value, measured as the discounted cash flows over the life of the asset is less than the carrying value. Future cash flows are estimated based on quantities of recoverable minerals, expected palladium and other commodity prices and expected foreign exchange rates (considering current, historical and expected future prices and foreign exchange rates and related factors), production levels and cash costs of production and capital and reclamation expenditures, all based on detailed life-of-mine plans and projections. The term "recoverable minerals" refers to the estimated amount of palladium and other commodities that will be obtained from proven and probable reserves after taking into account losses during mining, ore processing and concentrate treatment. Assumptions underlying future cash flow estimates are subject to risk and uncertainty. Any differences between significant assumptions and market conditions such as metal prices, exchange rates, recoverable metal, and/or the Company's operating performance could have a material effect on the Company's ability to recover the carrying amounts of its long-lived assets resulting in possible additional impairment charges.
Asset Retirement Obligations
Asset retirement obligations are recognized when incurred and recorded as liabilities at fair value. The amount of the liability is subject to re-measurement at each reporting period. The liability is accreted over time through periodic charges to earnings. In addition, the asset retirement obligation is capitalized as part of mining interests and amortized over the estimated life of the mine. Total undiscounted cash flows required to settle the obligations are estimated to be approximately $7,800 the majority of which is to be paid at the end of the mine life, which is currently expected in 2010. A credit adjusted risk-free rate of 4% has been utilized to determine the obligation recorded on the balance sheet. The estimated asset retirement obligation may change materially based on future changes in operations, costs of reclamation and closure activities, and regulatory requirements.
The following is a reconciliation of the changes in the asset retirement obligation during the year:

 	 	 	2007	 	 	2006	 	
	
Balance, beginning of the year	 	 	8,211	 	$	7,894	 	
Accretion expense	 	 	667	 	 	317	 	
	
Balance at the end of year	 	$	8,878	 	$	8,211	 	
	
Stock-Based Compensation Plans
The Company has a stock-based compensation plan which is described in note 13 (e) and a Restricted Share Unit Plan ("RSU") which is described in note 13 (g). The Company recognizes as an expense the cost of stock-based compensation based on the estimated fair value of new stock options granted to employees and directors. The fair value of each RSU, being the fair market value of the Company's common shares at the grant date, is recorded as a liability on the Company's consolidated balance sheet over the vesting period. The value of the RSU liability is adjusted to reflect changes in the market value of the Company's common shares at each period end.
Translation of Foreign Currency
The reporting and functional currency of the Company 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, comprehensive loss and deficit.
34

Income Taxes
The Company follows the asset and liability method of accounting for income taxes. Under this method, future tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the substantively enacted tax rates and laws that will be in effect when the differences are expected to reverse. The effect on future tax liabilities and assets of a change in tax rates is recognized in income in the period that the change occurs. The Company provides a valuation allowance for future tax assets when it is more likely than not that some portion or all of the future tax assets will not be realized.
Cash and cash equivalents
Cash and cash equivalents includes cash on account less outstanding cheques, demand deposits and short-term guaranteed investments with original maturities of three months or less and are stated at fair value.
Deferred Financing Costs
Deferred financing costs represents the costs of negotiating and securing the Company's long-term debt facilities. Effective January 1, 2007, the Company records all transaction costs for financial assets and financial liabilities as a reduction of the related asset or liability and the effective interest rate method is now used to amortize these costs to operations. As at January 1, 2007, the Company adjusted the carrying value of the related long-term debt and the convertible note payable using the effective interest method. The impact was a decrease in the carrying value of the convertible notes payable of $855 and a decrease in the long-term debt of $107 and a decrease in deferred financing costs of $962.
Basic and Diluted Loss Per Share
Basic loss per common share is computed by dividing the loss for the period by the weighted average number of common shares outstanding during the reporting period. Diluted loss per common share 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 notes and common share purchase warrants (equity instruments), 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.
Flow-through shares
The Company finances a portion of its exploration activities through the issue of flow-through shares. The Company renounces the deductions to investors and accordingly records share issue costs related to the future tax liability of the temporary difference arising from the renunciation. As a result, share capital is reduced and future income tax liabilities are increased by the estimated tax benefits when renounced by the Company to the investors, except to the extent that the Company has unused tax benefits on loss carryforwards and tax pools in excess of book value available for deduction against which a valuation allowance has been provided. In these circumstances, the future tax liability reduces the valuation allowance, if any, and the reduction is recognized in earnings.
Use of Estimates
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the 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.
35

Derivative Financial Instruments
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 had no outstanding forward commodity sales contracts as at December 31, 2007.
From time to time the Company may enter into foreign exchange forward sales contracts to manage the effect of fluctuations in the value of committed U.S. dollar denominated revenues. The Company had no outstanding foreign exchange forward sales contracts as at December 31, 2007.
The Company does not hold financial instruments or derivative financial instruments for trading purposes.
Adoption of New Accounting Standards
In July 2006, the Accounting Standards Board issued a replacement of The Canadian Institute of Chartered Accountants' Handbook ("CICA Handbook") Section 1506, Accounting Changes ("Section 1506"). The new standard allows for voluntary changes in accounting policy only when they result in the financial statements providing reliable and more relevant information, requires changes in accounting policy to be applied retrospectively unless doing so is impracticable, requires prior period errors to be corrected retrospectively and calls for enhanced disclosures about the effects of changes in accounting policies, estimates and errors on the financial statements. Section 1506 also requires disclosures of information relevant to assessing the possible impact of the application of a new GAAP standard on the Company's financial statements in the period of initial adoption. The adoption of Section 1506 effective January 1, 2007 has had no impact on these consolidated financial statements.
Financial Instruments
As required by The Canadian Institute of Chartered Accountants ("CICA"), on January 1, 2007, the Company adopted CICA Handbook Section 1530, Comprehensive Income; Section 3251, Equity; Section 3855, Financial Instruments – Recognition and Measurement; and Section 3861, Financial Instruments – Disclosure and Presentation. The adoption of these new standards resulted in changes in the presentation for financial instruments as described below. As required by the implementation of these new standards, the prior period consolidated financial statements have not been restated. The principal changes in the accounting for financial instruments arising from the adoption of these accounting standards are described below.
(a)
Section 1530, Comprehensive Income
Section 1530 requires a statement of comprehensive income, which consists of net income and other comprehensive income ("OCI"). OCI is a new requirement to temporarily present certain gains and losses from changes in fair value outside of net income. There has been no impact of this pronouncement for the year ended December 31, 2007, accordingly the Company's net income and comprehensive income are equal.
(b)
Section 3251, Equity
Section 3251 describes the changes in how to report and disclose equity and changes in equity as a result of the new requirements of Section 1530, including the changes in equity for the period arising from OCI. Accumulated changes in OCI are included in the accumulated other comprehensive income ("AOCI") and are presented in the consolidated statements of shareholders equity and comprehensive income as a separate component of shareholders' equity. The Company has no AOCI as a result of the adoption of this new accounting pronouncement, accordingly there is no impact on the consolidated financial statements as a result of the adoption of this standard.
36

c)
Section 3855, Financial Instruments – Recognition and Measurement Section 3861, Financial Instruments – Disclosure and Presentation
Under the new standards, financial assets and financial liabilities are initially recognized at fair value and their subsequent measurements are dependent on their classification as described below. Their classification depends on the purpose for which the financial instruments were acquired or issued, their characteristics and the Company's designation of such instruments. The standards require that all financial assets be classified either as held-for-trading, available for sale, held-to-maturity, or loans and receivables. The standards require that all financial assets, including all derivatives, be measured at fair value with the exception of loans and receivables, debt securities classified as held-to-maturity and available-for-sale financial assets that do not have quoted market prices in the active market. Settlement date accounting continues to be used for all financial assets, except changes in fair value between the trade date and settlement date are reflected in the consolidated statements of earnings for held-for-trading financial assets, while changes in fair value between trade date and settlement date are reflected in OCI for available-for-sale financial assets.
Loans and receivables
Loans and receivables are non-derivative financial assets that are initially recognized at fair value and thereafter are accounted for at cost or amortized cost.
Other liabilities
Other liabilities are initially recorded at fair value and thereafter are recorded at cost or amortized cost using the effective interest method and include all liabilities, other than derivatives or liabilities to which the fair value designation has been applied.
Embedded derivatives
Derivatives embedded in other financial instruments or contracts are separated from their host contracts and accounted for as derivatives when their economic characteristics and risk are not closely related to those of the host contract; the terms of the embedded derivatives are the same as those of the free-standing derivatives; and the combined instrument or contract is not measured at fair value, with changes in fair value recognized in income. These embedded derivatives are measured at fair value with changes therein recognized in the statement of earnings. As at December 31, 2007 and December 31, 2006, the Company has separated the early repayment call and put options on the Company's convertible notes payable. The fair value of the early repayment and put option was determined to be nominal and therefore there was no impact on the financial statements as a result of the bifurcation of these embedded derivatives.
Classification of financial instruments
The following is a summary of the accounting classification the Company has elected to apply to each of its significant categories of financial instruments outstanding as of January 1, 2007:
(i)
Concentrate awaiting settlement, net is classified as held for trading;

(ii)
Other assets are classified as loans and receivables; and

(iii)
All financial liabilities as other financial liabilities.
Future Accounting Standards
Financial Instruments – Recognition and Measurement
In December 2006, the CICA released new Handbook sections 3862, "Financial Instruments – Disclosures", and 3863, "Financial Instruments – Presentation", effective for fiscal years beginning on or after October 1, 2007. Section 3862, describes the required disclosures related to the significance of financial instruments on the Company's financial position and performance and the nature and extent of risks arising for financial instruments to which the entity is exposed and how the entity manages those risks. This section complements handbook sections 3855, "Financial Instruments – Recognition and Measurements"; 3863, "Financial Instruments – Presentation; and 3865, "Hedges". Section 3863
37

establishes standards for presentation of financial instruments and non financial derivatives. This section complements handbook section 3861, "Financial Instruments – Disclosure and Presentation". The Company has not yet determined the effect these new standards will have on its financial position and results of operations.
Capital Disclosures
In December 2006, the CICA released new Handbook section 1535, "Capital Disclosures", which establishes standards for disclosing information about a Company's capital and how it is managed, to enable users of financial statements to evaluate the Company's objectives, policies and procedures for managing capital. This section will apply to interim and annual financial statements relating to fiscal years beginning on or after October 1, 2007. The Company has not yet determined the effect these new standards will have on its financial position and results of operations.
Inventories
In June 2007, the CICA released new handbook section 3031, "Inventories," effective for fiscal years beginning on or after January 1, 2008. Section 3031 supersedes the existing CICA section 3030, "Inventories," and provides additional guidance on the determination of cost and its subsequent recognition as an expense, including any write-down to net realizable value, and disclosures made within the financial statements. The Company has not yet determined the effect these new standards will have on its financial position and results of operations.
3.  CONCENTRATE AWAITING SETTLEMENT
Concentrate awaiting settlement is comprised of:

 	 	 	2007	 	 	2006	 	 	
	
Concentrate awaiting settlement, gross	 	$	85,869	 	$	88,034	 	 	
Refining and smelter treatment charges	 	 	(6,782	)	 	(5,984	)	 	
	
Concentrate awaiting settlement, net	 	$	79,087	 	$	82,050	 	 	
	
The gross value of concentrate awaiting settlement represents the value of all PGMs and base metals from production shipped to and received by the third-party smelter between May and December 2007, including 125,802 ounces of palladium which was valued at the December 31, 2007 London Metal Exchange ("LME") afternoon price fix of US$364 (2006 – including 129,496 ounces of palladium valued at US$322). The LME afternoon price fix as at March 18, 2008 was US$481.
All of the concentrate awaiting settlement is due from one domestic customer at December 31, 2007 (2006 – two domestic customers). A reserve for doubtful accounts has not been established, as in the opinion of management, the amount due will be fully realized.
4.  INVENTORIES
Inventories consist of the following:

 	 	 	2007	 	 	2006	 	
	
Concentrate	 	$	3,026	 	$	3,782	 	
Supplies	 	 	14,847	 	 	10,382	 	
	
 	 	$	17,873	 	$	$14,164	 	
	
38

5.  MINING INTERESTS
(a)
Mining interests are comprised of the following:

 	 	 	2007	 	 	2006	 	 	
	
Plant and equipment, at cost	 	$	368,339	 	$	362,151	 	 	
Underground mine development, at cost	 	 	52,174	 	 	43,015	 	 	
Accumulated amortization and impairment charges	 	 	(319,388	)	 	(277,397	)	 	
	
 	 	 	101,125	 	 	127,769	 	 	
	
Equipment under capital lease, at cost	 	 	14,076	 	 	14,076	 	 	
Accumulated amortization and impairment charges	 	 	(7,022	)	 	(3,991	)	 	
	
 	 	 	7,054	 	 	10,085	 	 	
	
Mining leases and claims, royalty interest, and development, at cost	 	 	82,561	 	 	82,561	 	 	
Accumulated amortization and impairment charges	 	 	(76,276	)	 	(73,798	)	 	
	
 	 	 	6,285	 	 	8,763	 	 	
	
Mining interests, net	 	$	114,464	 	$	146,617	 	 	
	
(b)
Amortization expense is comprised of:

 	 	 	2007	 	 	2006	 	 	2005	 	
	
Capital assets (including plant and equipment, and equipment under capital lease)	 	$	44,430	 	$	28,422	 	$	17,384	 	
Mining leases and claims, royalty interest, and development costs	 	 	2,478	 	 	1,681	 	 	913	 	
	
 	 	$	46,908	 	$	30,103	 	$	18,297	 	
	
(c)
As at December 31, each year, the Company tests its long-lived assets, including mineral interests and plant and equipment for impairment, and reflects an impairment charge if needed.
There was no impairment charge required for 2007 (2006 – $nil, 2005 – $nil).
39

6.  MINE RESTORATION DEPOSIT
The Company, in conjunction with the Ontario Ministry of Northern Development and Mines (the "Ministry"), has established a trust fund (the "Fund") pursuant to the Company's mine closure plan for eventual clean-up and restoration of the mine site. The mine closure plan calls for a total amount of $7,802 to be accumulated in the Fund.
Commencing in February 2001, the Fund, controlled by the Ministry, started to accumulate through monthly deposits of $100. At December 31, 2007, the Company had $8,272 (2006 – $8,041) on deposit with the Ministry including accrued interest of $742. All current amounts required have been contributed as at December 31, 2007. The funds on deposit bear interest at current short-term deposit rates and will be returned to the Company once the mine closure is completed. The estimated asset retirement obligation may change materially based on future changes in operations, costs of reclamation and closure activities, and regulatory requirements.
7.  DEFERRED FINANCING COSTS

 	 	 	2007	 	 	2006	 	 	
	
Financing costs	 	$	–	 	$	1,610	 	 	
Accumulated amortization	 	 	–	 	 	(648	)	 	
	
 	 	$	–	 	$	962	 	 	
	
As at January 1, 2007, the Company adjusted the carrying value of the related long-term debt and the convertible note payable using the effective interest method. The impact was a decrease in the carrying value of the convertible notes payable of $855 and a decrease in the long-term debt of $107 and a decrease in deferred financing costs of $962.
8.  OBLIGATIONS UNDER CAPITAL LEASES
The following is a schedule of future minimum lease payments under capital leases together with the present value of the net minimum lease payments:

 	 	 	2007	 	 	2006	 	 	
	
2007	 	$	–	 	$	2,422	 	 	
2008	 	 	1,830	 	 	2,166	 	 	
2009	 	 	1,499	 	 	1,775	 	 	
2010	 	 	402	 	 	473	 	 	
	
Total minimum lease payments	 	 	3,731	 	 	6,836	 	 	

Amounts representing interest at rates from 3.5% – 6.8%	

(235	
)	
 	
(621	
)	

Present value of minimum lease payments	 	 	3,496	 	 	6,215	 	 	
Less current portion	 	 	(1,672	)	 	(2,104	)	 	
	
 	 	$	1,824	 	$	4,111	 	 	
	
9.  CONVERTIBLE NOTES PAYABLE

 	 	 	2007	 	 	2006	 	 	
	
Series I convertible notes – maturing August 1, 2008	 	$	17,011	 	$	32,048	 	 	
Series II convertible notes – maturing December 1, 2008	 	 	8,699	 	 	13,162	 	 	
	
 	 	 	25,710	 	 	45,210	 	 	
Less current portion	 	 	(25,710	)	 	(22,148	)	 	
	
 	 	$	–	 	$	23,062	 	 	
	
40

On March 29, 2006, the Company issued US$35,000 ($41,037) aggregate principal amount of Series I convertible notes (the "Series I Notes") due August 1, 2008 through a private placement of convertible notes and common share purchase warrants. The Offering was to Kaiser-Francis Oil Company (Kaiser-Francis) and an institutional investor (collectively the "Purchasers"). The Offering is governed by a securities purchase agreement dated March 24, 2006 (the "SPA") among the Company and the Purchasers.
The Series I Notes were initially convertible into 2,873,563 common shares of the Company at any time by the holder at US$12.18 per share. Warrants exercisable to purchase 1,436,782 common shares were issued with the Series I Notes, each warrant being exercisable to purchase one common share at an exercise price of US$13.48 until March 29, 2010 (see anti-dilution provisions below).
The Company, at its option, had the right to sell to Kaiser-Francis up to US$13,500 principal amount a Series II Note (a second tranche) on or before June 30, 2006, which would be used to repay the loan under the existing Kaiser-Francis credit facility (refer to note 11). On June 23, 2006, the Company exercised this right and issued to Kaiser-Francis US$13,500 ($15,176) aggregate principal amount a Series II Note, due December 1, 2008. The Series II Note was initially convertible into 1,108,374 common shares of the Company at any time by the holder at US$12.18 per share. Warrants exercisable to purchase 554,187 common shares were issued with the Series II Note, with each warrant being exercisable to purchase one common share at an initial exercise price of US$13.48 until June 23, 2010 (see anti-dilution provisions below).
The convertible notes and the related Series I and Series II Warrants contain "full ratchet" anti-dilution provisions. Under these provisions, if at any time prior to August 1, 2008 the Company issues securities (including common shares or warrants convertible into common shares) at a price per share (the "effective price") less than a stated amount, the conversion/exercise price of the outstanding convertible notes and Series I and Series II Warrants is reduced downward to equal the effective price, subject to a floor price of US$9.12 for the Series I Notes, US$6.67 for the Series II Note, US$10.73 for the Series I Warrants and US$7.85 for the Series II Warrants. On account of the unit offering that closed on December 13, 2007, the conversion price of the Series I Notes, the Series II Note, the Series I Warrants and the Series II Warrants decreased to their respective floor prices.
The Series I and II Notes bear interest at a rate of 6.5% per annum payable bi-monthly. Series I and II Notes are repayable in nine equal installments commencing April 1, 2007 and August 1, 2007, respectively. The interest payments and/or repayment amounts may be paid to each Purchaser, at the Purchaser's option, in any combination of cash and/or common shares. If common shares are issued for interest payments or in repayment of the convertible notes they will be issued at a 10% discount from the weighted average trading price of the common shares on the AMEX for the five consecutive trading days immediately prior to applicable payment date. The Company has the right to defer any principal repayment in cash until a later principal repayment date. There is no limit on the length of the deferral, other than it cannot be deferred later than the final maturity date. The Company must give five (5) business days prior notice of its intention to defer principal repayments. During 2007, the Purchasers elected to receive common shares in settlement of both their interest and principal repayments.
Commencing June 29, 2007 for Series I and September 23, 2007 for Series II, if the weighted average trading price of the common shares for each of any 25 consecutive trading days is 150% or more of the initial conversion price (as adjusted for any stock dividend or split, or similar transaction), the Company will have the right to force the Purchasers to convert all or any of the outstanding principal amount of the convertible notes at the conversion price.
Under Canadian GAAP, the components of the convertible notes must be bifurcated and accounted for separately as debt and equity instruments. The warrants are separable from the notes and are accounted for as an equity instrument. The Series I proceeds received were allocated to the debt and equity components of the notes and to the initial warrants on a relative fair value basis as follows: US$20,558 to
41

the debt, US$8,808 to the equity component and US$5,634 to the warrants. The Series II Note proceeds were allocated as follows: US$9,578 to the debt, US$2,312 to the equity component and US$1,610 to the warrants. In addition, a liability (the "Equity Premium") was recognized for the holders' option to receive common shares, in lieu of cash, at a 10% discount to the five day weighted trading price, as described above, for interest and principal payments. The Company accretes the carrying value of the convertible notes and the Equity Premium such that at each installment payment date, the carrying value of the notes and the Equity Premium will be equal to the face value of the notes and the liability related to the Equity Premium. The Company recorded accretion expense of $12,947 (2006 – $10,090), of which $3,245 (2006 – $2,523) represented the accretion relating to the Equity Premium which was included in the carrying value of the convertible notes payable as at December 31, 2007.
The fair value of the debt was determined based on the future payments of principal and interest for a debt instrument of comparable maturity and credit quality, excluding any conversion option by the holder. The Series I Notes carry an effective interest of 42%. The Series II Note carries an effective interest rate of 28%.
The conversion option or equity component of the Notes was valued using a Binomial model. The fair value of the warrants was determined based on the Black-Scholes option pricing model. The models used in the valuation of the components of the convertible debt contain certain subjective assumptions, changes of which can cause significant variation in the estimated fair value of the debt and equity components of the notes.
The issue costs of $2,364 have been allocated pro-rata to the debt ($1,398) and equity components ($589) of the Series I and II Notes and to the associated warrants ($377) on a relative fair value basis. The financing costs related to the debt components are being amortized over the term of the convertible notes using the effective interest method.
As at December 31, 2007, the principal amount outstanding on the Series I and Series II convertible notes was US$17,500 (2006 – US$35,000) and US$9,000 (2006 – US$13,500) respectively.
10.  LONG-TERM DEBT

 	 	 	2007	 	 	2006	 	 	
	
Equipment finance company credit facility consisting of $4,000 and US$6,000 (2006 – $6,000 and US$10,000) loans	 	$	9,928	 	$	17,654	 	 	
Less: financing costs (net of amortization)	 	 	(53	)	 	–	 	 	
	
 	 	 	9,875	 	 	17,654	 	 	
Less current portion	 	 	(5,918	)	 	(6,662	)	 	
	
 	 	$	3,957	 	$	10,992	 	 	
	
The Company's long-term debt is comprised of a senior credit facility with an equipment finance company. The interest rate under the loan facility is LIBOR plus 2.50%, or 7.10% at December 31, 2007 (7.82% – 2006). The senior credit facility is repayable in equal quarterly installments over a five-year period with a final maturity of November 24, 2009. In return for granting the loan, the lender received a first priority security in all of the Company's existing and future assets excluding its production leases and claims. The credit facility allows in certain circumstances, full repayment of outstanding loans at any time during the term of the facility.
11.  KAISER-FRANCIS CREDIT FACILITY
At the time the Company entered into its senior credit facility (note 10), certain terms under the US$20,000 non-revolving credit facility with Kaiser-Francis Oil Company ("Kaiser-Francis") were amended. The final maturity date was extended to June 30, 2006 from May 31, 2005 and the interest rate was reset based upon the 30 day LIBOR rate plus 2.50%. The Kaiser-Francis credit facility was repaid on June 23, 2006 pursuant to the terms of the Series II convertible note issued on that date (note 9).
42

On October 12, 2006, the Company completed a transaction with Kaiser-Francis for a US$5,000 short-term working capital loan maturing December 31, 2006. The interest rate under the loan was the 30 day LIBOR rate plus 2.50%. The Company paid a commitment fee of US$38 and amounts not drawn under the loan were subject to a standby fee of 0.125% per annum. In connection with the loan, the Company granted to Kaiser-Francis a first priority security interest in the inventory and receivables of the Company. On December 13, 2006 the maturity date was extended to March 31, 2007, with no other changes in terms. The Company paid a commitment fee of US$25 for the extension. This loan was repaid in full from the proceeds of the first advance payment, in accordance with the terms of the palladium and platinum purchase facility (note 15 (a)).
12.  RELATED PARTY TRANSACTIONS AND COMMITMENTS
Kaiser-Francis is the major shareholder of the Company. In addition to the related party transactions with Kaiser-Francis disclosed in note 11, the Company had the following related party transactions:
(a)
Under the terms of the Company's convertible notes, the Company may not offer equity securities without first offering to the noteholders a pre-emptive right to each to subscribe for 12.5% of the total equity securities being offered. If either noteholder subscribes for less than its 12.5% share, the unused right shall then be offered to the non-declining party, Kaiser-Francis or the institutional investor, as the case may be. As a result of this provision of the agreement, Kaiser-Francis exercised the pre-emptive right and subscribed for 25% of the unit offering that closed on December 13, 2007.

(b)
In 2005, a now former director of the Company received a fee of $218 in connection with the negotiations related to a Palladium Sales Contract entered into by the Company in 2000. The contract was negotiated at arms-length prior to such person becoming a director of the Company. The Palladium Sales Contract expired on June 30, 2005, and no further fees are payable in connection with this contract.
13.  SHAREHOLDERS EQUITY
(a)
Authorized Capital Stock
The authorized capital stock of the Company consists of an unlimited number of common shares and an unlimited number of special shares, issuable in series, including 10,000,000 Series "A" preferred shares.
(b)
Common share purchase warrants:
The changes in issued common share purchase warrants for the year are summarized below:

 	 	2007	 	2006	 	
 	 	Shares	 	 	Amount	 	Shares	 	 	Amount	 	
	
Balance beginning of year	 	1,990,969	 	 	8,038	 	 	 	 	 	 	
 	Issued pursuant to terms of Series I convertible notes, net of issue costs	 	–	 	 	–	 	1,436,782	 	 	6,238	 	
 	Issued pursuant to terms of Series II convertible note, net of issue costs	 	–	 	 	–	 	554,187	 	 	1,800	 	
 	Issued pursuant to unit offering, net of issue costs	 	9,333,333	 	 	5,155	 	 	 	 	 	 	
	
Balance, end of year	 	11,324,302	 	$	13,193	 	1,990,969	 	$	8,038	 	
	
On December 13, 2007 the Company completed a public offering of 18,666,667 units at a price of US$4.00 per unit ($4.04 per unit) for total net proceeds of approximately US$68,719 (issue costs US$5,919). Each unit consisted of one common share and one half of a common share purchase warrant of the Company. Each whole warrant will entitle the holder to purchase one common share at a price of US$5.05 per share at any time on or prior to December 13, 2009.
43

In connection with the issue of the convertible notes, warrants to purchase 1,990,969 common shares were issued and are outstanding as follows:

Number of Warrants	 	Exercise Price	 	Expiry Date	 	 	 	
	 	 	 	
1,436,782	 	US$10.73	 	March 29, 2010	 	 	 	
   554,187	 	US$7.85	 	June 23, 2010	 	 	 	
	 	 	 	
In connection with the issue of the unit offering, warrants to purchase 9,333,333 common shares were issued and are outstanding as follows:

Number of Warrants	 	Exercise Price	 	Expiry Date	 	 	 	
	 	 	 	
9,333,333	 	US$5.05	 	December 13, 2009	 	 	 	
	 	 	 	
(c)
Group Registered Retirement Savings Plan
The Company has a group registered retirement savings plan, which all employees can participate in at their option. The Company is required to make matching contributions to a maximum of $5 per employee per annum. The Company's matching contribution can be made either in cash or treasury shares of the Company. During 2007 the Company contributed 138,685 shares with a fair value of $1,204, (2006 – 107,563 shares with a fair value of $1,085).
(d)
Private Placement
On February 27, 2007, the Company completed a private placement of 550,000 flow-through common shares. The gross proceeds of $6,050 must be spent on Canadian exploration expenses prior to December 31, 2008. As at December 31, 2007, the Company has spent $628 on Canadian exploration expenses as defined in Section 66 of the Income Tax Act (Canada).
On June 23, 2006, the Company completed a private placement of 270,000 flow-through common shares. The gross proceeds of $3,375 were spent on Canadian exploration expenses as defined in Section 66 of the Income Tax Act (Canada) prior to December 31, 2007.
On April 21, 2005, the Company completed a private placement of 213,000 flow-through common shares. The gross proceeds of $2,503 were spent on Canadian exploration expenses as defined in Section 66 of the Income Tax Act (Canada) prior to December 31, 2006.
Under the terms of the flow-through common share issues, the tax attributes of the related expenditures are renounced to investors and the share capital is reduced and future income tax liabilities is increased by the estimated income tax benefits renounced by the Company to the investors. The tax attributes for the 2006 expenditures were renounced in 2007, and those from 2005 were renounced in 2006.
(e)
Corporate Stock Option Plan
The Company has adopted, and the shareholders have approved, the Corporate Stock Option Plan (the "Plan"), under which eligible directors, officers, employees and consultants of the Company are entitled to receive options to acquire common shares. The Plan is administered by the Compensation Committee, a subcommittee of the Board of Directors, which determines the number of options to be issued, the exercise price (which may not be lower than the closing price of the Company's common shares on the Toronto Stock Exchange ("TSX") on the day prior to the date of grant), 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 a limited time period should the optionee cease to be an "Eligible Person" as set forth in the conditions of the Plan. Options granted vest as to 1 / 3 on each of the first three anniversary dates of the date of grant.
44

The maximum number of common share options available for grant shall not exceed 2,700,000 being approximately 3.6% of the outstanding common shares or such greater number of common shares as may be determined by the Board of Directors, and approved if required, by the shareholders of the Company and by any relevant stock exchange or other regulatory authority. As at December 31, 2007, 532,757 options (2006 – 534,057 options) were available to be granted under the Plan.
The following summary sets out the activity in outstanding common share purchase options:

 	 	2007	 	2006	 	
 	 	Shares	 	 	Weighted-Average Exercise Price	 	Shares	 	 	Weighted-Average Exercise Price	 	
	
Outstanding, beginning of year	 	360,133	 	$	10.24	 	563,638	 	$	10.43	 	
Granted	 	132,500	 	 	9.05	 	65,000	 	 	8.15	 	
Exercised	 	(5,000	)	 	3.42	 	(130,755	)	 	6.96	 	
Cancelled	 	(131,200	)	 	10.25	 	(137,750	)	 	13.15	 	
	
Outstanding, end of year	 	356,433	 	$	9.89	 	360,133	 	$	10.24	 	
	
Options exercisable at end of year	 	191,600	 	$	10.76	 	166,432	 	$	10.70	 	
	
The following table summarizes information about the Company's stock options outstanding at December 31, 2007:

Exercise Price	 	Expiry Dates	 	Options Outstanding
at Dec. 31, 2007	 	Options Exercisable
at Dec. 31, 2007	 	
	
$  4.75	 	February 27, 2011	 	7,500	 	7,500	 	
$  7.85	 	August 26, 2014	 	30,000	 	10,000	 	
$  8.12	 	October 8, 2015	 	15,000	 	–	 	
$  8.40	 	June 20, 2014	 	35,000	 	11,667	 	
$  8.45	 	April 1, 2015	 	40,000	 	–	 	
$  8.83	 	December 14, 2013	 	10,000	 	6,667	 	
$  8.87	 	January 14, 2015	 	7,500	 	–	 	
$  9.03	 	March 1, 2015	 	9,000	 	–	 	
$10.00	 	November 27, 2013	 	50,000	 	33,333	 	
$10.18	 	April 15, 2015	 	30,000	 	–	 	
$11.90	 	June 23, 2012	 	122,433	 	122,433	 	
 	 	 	 		 	
 	 	 	 	356,433	 	191,600	 	
 	 	 	 		 	
The fair value of options granted in 2007 has been estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: risk free interest rate of 3.97% (2006 – 4.05%; 2005 – 3.78%), expected dividend yield of nil (2006 – nil; 2005 – nil), expected volatility of 54% (2006 – 55%; 2005 – 55%), and expected option life of 4 years (2006 – 4 years; 2005 – 4 years). The estimated fair value of the options is expensed over the option's vesting period, which is 3 years. The weighted average fair market value of options granted in 2007 was $4.11 (2006 – $3.78; 2005 – $4.51). Compensation expense related to the Plan for the year ended December 31, 2007 was $414 (2006 – $561; 2005 – $582).
45

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

 	 	 	2007	 	 	2006	 	 	2005	 	 	
	
Net loss available to common shareholders	 	$	(28,680	)	$	(34,109	)	$	(53,611	)	 	
	
Weighted average number of shares outstanding	 	 	55,792,203	 	 	52,562,939	 	 	52,006,548	 	 	
Effect of dilutive securities	 	 	 	 	 	 	 	 	 	 	 	
 	stock options	 	 	–	 	 	–	 	 	–	 	 	
	
Weighted average diluted number of shares outstanding	 	 	55,792,203	 	 	52,562,939	 	 	52,006,548	 	 	
	
Diluted net loss per share	 	$	(0.51	)	$	(0.65	)	$	(1.03	)	 	
	
The effect of stock options and warrants has not been included in the determination of diluted loss per share for 2007, 2006 or 2005, because to do so would be anti-dilutive.
At December 31, 2007, there were 14,794,088 (2006 – 6,172,671) equity instruments convertible to common shares. These have been excluded from the calculation of diluted net loss per share because to do so would have been anti dilutive. These equity instruments could potentially dilute basic earnings per share in the future.
(g)
Other Stock-Based Compensation – Restricted Share Unit Plan
Effective December 14, 2005, the Company adopted an 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 means a unit equivalent in value to the fair market value of a common share of the Company on the date of the award. The RSU plan is administered by the Board of Directors, which will determine after considering recommendations made by the compensation committee, the number and timing of restricted share units to be awarded and their vesting periods, not to exceed three years. On each relevant full vesting date of awarded restricted share units, the participant will receive a lump sum cash payment equivalent to the market value of the equivalent number of common shares. The value of each award is charged to compensation expense over the period of vesting and a corresponding liability is established on the balance sheet. The compensation expense and liability are adjusted to reflect the changes in market value of the equivalent number of common shares during the vesting period.
As at December 31, 2007, 10,001 (2006 – 33,333) restricted share units have been granted and are outstanding at a weighted average value of $8.72 (2006 – $9.09) per unit and $89 (2006 – $180) has been charged to compensation expense. The market value of the restricted share units as at December 31, 2007 is $3.64 (2006 – $8.87) per unit.
14.  FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the obligations under capital leases approximate their carrying value due to the interest rate implicit in the leases approximating interest rates available at this time for similar lease terms. The fair value of the convertible notes approximate their carrying value due to the interest rate implicit in the convertible notes approximating interest rates available at this time for similar convertible notes payable. The carrying amounts of all other financial instruments on the balance sheet approximate fair value due to their short-term maturities.
15.  COMMITMENTS
(a)
Palladium and Platinum Advance Purchase Facility
On January 19, 2007 the Company entered into a palladium and platinum advance purchase facility with Auramet Trading, LLC ("Auramet"), a precious metals merchant, providing for the sale of an average of 10,000 ounces of palladium and 500 ounces of platinum per month. The Company may not request Auramet to purchase metals after June 15, 2008 and all sales and payments prior to that date are required to be settled by December 31, 2008. Under the terms of the agreement the Company may receive advance payments not exceeding, at any time, an aggregate maximum of US$25,000. The
46

Company pays a commitment fee of 0.50% per annum, payable monthly, on the unused portion of the facility.
The purchase price may be fixed or provisional. For fixed pricing the Company may price at either: (i) Auramet's current market bid price at the time of the transaction, or (ii) market limit orders, as defined under the terms of the agreement. In the case of provisional pricing, it is determined based on the afternoon fixing of the London Bullion Marketing Association immediately preceding the purchase. In each case such pricing will reflect the forward value corresponding to the scheduled delivery date. Advance payments to the Company may not exceed specified values of fixed and provisionally priced palladium and platinum. Provisional prices must be fixed prior to the scheduled delivery date for such precious metals. Each advance payment will be subject to a discount equal to LIBOR plus 1.90% per annum for the period between the date the advance payment is made and the scheduled delivery date. Upon the delivery of the precious metals to Auramet, Auramet will pay to the Company the difference between the advance payment and the purchase price.
To secure the obligations of the Company under the Agreement, the Company has granted to Auramet a security interest in, among other things, the concentrates (including the precious and base metals contained therein) mined at the Lac des Iles mine, together with the proceeds arising from the sale of the concentrate, and, by way of security, an assignment of its smelting and refining agreement.
The first advance payment was used to repay the US$5,000 working capital loan from the Corporation's major shareholder, while subsequent advance payments will be used to finance working capital requirements. The balance outstanding under the advance purchase facility at December 31, 2007 is $nil.
(b)
Sheridan Platinum Group of Companies ("SPG") Commitment
The Company is required to pay a royalty to SPG equal to 5% of the Net Cash Proceeds, as defined in the agreement from mining operations until the expiration of the Lac des Iles leases.
(c)
Operating Leases and Other Purchase Obligations
As at December 31, 2007, the Company had outstanding operating lease commitments and other purchase obligations of $3,257 and $10,808, respectively (2006 – $4,695 and $1,351) all of which had maturities of less than five years.
(d)
Flow-through shares
To satisfy its commitments pursuant to the issuance of flow-through shares, the Company is required to spend $6,050 of qualifying Canadian exploration expenses, as defined in the Income Tax Act (Canada), by December 31, 2008 (2006 – $3,375, by December 31, 2007).
47

16.  REVENUE FROM METAL SALES

 	 	 	Total	 	Palladium	 	Platinum	 	Gold	 	Nickel	 	Copper	 	Other Metals	 	 	
	
2007	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Year ended December 31	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenue – before pricing adjustments	 	$	201,367	 	95,146	 	29,183	 	12,315	 	46,862	 	15,589	 	2,272	 	 	
Pricing adjustments:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Commodities	 	 	8,756	 	3,443	 	4,516	 	1,825	 	(1,621	)	180	 	413	 	 	
Foreign exchange	 	 	(14,191	)	(6,783	)	(2,723	)	(1,177	)	(2,653	)	(765	)	(90	)	 	
	
Revenue – after pricing adjustments	 	$	195,932	 	91,806	 	30,976	 	12,963	 	42,588	 	15,004	 	2,595	 	 	
	
2006	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Year ended December 31	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenue – before pricing adjustments	 	$	145,819	 	70,645	 	23,438	 	8,970	 	27,930	 	13,984	 	852	 	 	
Pricing adjustments:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Commodities	 	 	11,674	 	4,133	 	821	 	769	 	4,964	 	697	 	290	 	 	
Foreign exchange	 	 	1,707	 	866	 	177	 	105	 	406	 	144	 	9	 	 	
	
Revenue – after pricing adjustments	 	$	159,200	 	75,644	 	24,436	 	9,844	 	33,300	 	14,825	 	1,151	 	 	
	
2005	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Year ended December 31	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenue – before pricing adjustments	 	$	85,233	 	38,364	 	16,635	 	5,950	 	15,845	 	7,464	 	975	 	 	
Pricing adjustments:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Commodities	 	 	7,727	 	4,980	 	847	 	662	 	188	 	853	 	197	 	 	
Foreign exchange	 	 	(354	)	54	 	(338	)	(44	)	8	 	(33	)	(1	)	 	
	
Revenue – after pricing adjustments	 	$	92,606	 	43,398	 	17,144	 	6,568	 	16,041	 	8,284	 	1,171	 	 	
	
The Company delivers all of its concentrate to one customer (2006 – two customers) under the terms of an agreement. The customer has agreed to smelt and refine all of the Company's concentrate to March 31, 2010, with an option by mutual agreement to extend for a further two years to March 31, 2012.
48

17.  INTEREST AND OTHER FINANCING COSTS

 	 	Note	 	 	2007	 	 	2006	 	 	2005	 	 	
	
Interest on convertible notes payable	 	9	 	$	2,763	 	$	2,519	 	$	–	 	 	
Accretion expense relating to convertible notes payable	 	9	 	 	12,947	 	 	10,090	 	 	–	 	 	
	
 	 	 	 	 	15,710	 	 	12,609	 	 	–	 	 	
Interest on long term debt	 	10	 	 	1,013	 	 	1,505	 	 	1,651	 	 	
Interest on capital leases	 	8	 	 	460	 	 	404	 	 	22	 	 	
Interest on Kaiser Francis credit facility	 	11	 	 	90	 	 	569	 	 	836	 	 	
	
 	 	 	 	 	17,273	 	 	15,087	 	 	2,509	 	 	
Interest on advance purchase facility	 	15	 	 	446	 	 	148	 	 	–	 	 	
Other interest and financing costs	 	 	 	 	837	 	 	123	 	 	41	 	 	
Deferred financing costs	 	 	 	 	751	 	 	1,090	 	 	43	 	 	
	
 	 	 	 	 	19,307	 	 	16,448	 	 	2,593	 	 	
Interest income	 	 	 	 	(674	)	 	(801	)	 	(1,641	)	 	
	
 	 	 	 	$	18,633	 	$	15,647	 	$	952	 	 	
	
18.  CONTINGENCIES
(a)
The Company is a defendant in an action by another mining company claiming actual damages in the amount of $20,000, punitive and exemplary damages in the amount of $5,000, and a declaration that the Company held the Compania Minerales de Copan, S.A. de C.V. ("Copan") property in trust for the plaintiff. This action relates to a predecessor company of the Company and has been inactive for sometime. No provision has been made in the accounts as at December 31, 2007 or 2006 for any possible loss from this action as management of the Company believes it has a valid defense and it has been indemnified by SPG regarding this action. In addition, certain stock options are claimed to be held by employees of Copan. These options have not been included in note 13(a) as the Company has been indemnified by SPG regarding such matters.

(b)
The Company has filed a claim with its insurance company relating to losses incurred in connection with the failure of the primary crusher in 2002. During 2004, the Company received $7,148 as an interim payment against this claim and has included this amount in income from mining operations. The Company is pursuing the balance of its insurance claim and will record any additional recovery in income if and when received.

(c)
From time to time, the Company is involved in other litigation, investigations, or proceedings related to claims arising out of its operations in the ordinary course of business. In the opinion of the Company's management, these claims and lawsuits in the aggregate, even if adversely settled, will not have a material effect on the consolidated financial statements.
49

19.  INCOME TAXES
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 36.1% (2006 – 36.1%, 2005 – 36.1%).

 	 	 	2007	 	 	2006	 	 	2005	 	 	
	
Income tax recovery using statutory income tax rates	 	$	(10,692	)	$	(12,822	)	$	(21,524	)	 	
Increase (decrease) in taxes resulting from:	 	 	 	 	 	 	 	 	 	 	 	
 	Resource allowance	 	 	77	 	 	133	 	 	3,354	 	 	
 	Non-taxable portion of capital gains	 	 	(1,196	)	 	(76	)	 	(162	)	 	
 	Losses not tax benefited	 	 	10,126	 	 	11,002	 	 	16,556	 	 	
 	Losses incurred in foreign entities, taxed at a lower rate	 	 	569	 	 	701	 	 	–	 	 	
 	Federal large corporations taxes	 	 	–	 	 	–	 	 	339	 	 	
 	Ontario mining taxes	 	 	177	 	 	(195	)	 	(1,654	)	 	
 	Other	 	 	2	 	 	(152	)	 	209	 	 	
	
Income and mining tax recovery	 	$	(937	)	$	(1,409	)	$	(2,882	)	 	
	
The details of the Company's income and mining tax recovery are as follows:

 	 	 	2007	 	 	2006	 	 	2005	 	 	
	
Current income tax expense (recovery):	 	 	 	 	 	 	 	 	 	 	 	
Income taxes	 	 	–	 	 	(360	)	 	(15	)	 	
Mining taxes	 	 	–	 	 	(310	)	 	80	 	 	
Federal large corporations tax	 	 	–	 	 	–	 	 	339	 	 	
	
 	 	 	–	 	 	(670	)	 	404	 	 	
	
Future income tax expense (recovery):	 	 	 	 	 	 	 	 	 	 	 	
Income taxes	 	 	(1,114	)	 	(854	)	 	(1,552	)	 	
Mining taxes	 	 	177	 	 	115	 	 	(1,734	)	 	
	
 	 	$	(937	)	$	(739	)	$	(3,286	)	 	
	
 	 	$	(937	)	$	(1,409	)	$	(2,882	)	 	
	
50

Future tax assets (liabilities) consist of the following temporary differences:

 	 	 	2007	 	 	2006	 	 	
	
Long-term future income tax asset:	 	 	 	 	 	 	 	 	
 	Mining interests, net	 	 	38,476	 	 	38,185	 	 	
 	Deferred financing costs	 	 	2,004	 	 	414	 	 	
 	Mine restoration obligation	 	 	2,235	 	 	2,532	 	 	
 	Future mining tax liability	 	 	106	 	 	101	 	 	
 	Other assets	 	 	141	 	 	199	 	 	
 	Non-capital loss carry-forwards	 	 	10,556	 	 	13,363	 	 	
 	Ontario corporate minimum tax credits	 	 	327	 	 	327	 	 	
 	Capital loss carry-forwards	 	 	533	 	 	847	 	 	
 	Valuation allowance	 	 	(52,941	)	 	(55,089	)	 	
	
Net future income tax asset, long-term	 	 	1,437	 	 	879	 	 	
	
Future income tax liability, long-term:	 	 	 	 	 	 	 	 	
 	Long-term debt	 	 	(300	)	 	(289	)	 	
 	Convertible notes payable	 	 	(447	)	 	40	 	 	
 	Kaiser-Francis credit facility	 	 	–	 	 	(4	)	 	
 	Obligations under capital leases	 	 	(122	)	 	(72	)	 	
	
Net future income tax liability, long term	 	 	(869	)	 	(325	)	 	
	
Net future income tax asset, long-term	 	$	568	 	$	554	 	 	
	
Future income tax liability, current:	 	 	 	 	 	 	 	 	
 	Inventories	 	 	–	 	 	(147	)	 	
 	Crushed and broken ore stockpiles	 	 	(564	)	 	(399	)	 	
 	Deferred financing costs	 	 	(4	)	 	(8	)	 	
	
Future tax liability, current	 	$	(568	)	$	(554	)	 	
	
Future income tax assets (liabilities)	 	$	–	 	$	–	 	 	

Future mining tax liability, current:	

 	

 	

 	Inventories	 	 	–	 	 	(40	)	 	
 	Crushed and broken ore stockpiles	 	 	(168	)	 	(109	)	 	
	
Future mining tax liability, current	 	 	(168	)	 	(149	)	 	
	
Future mining tax liability, long-term:	 	 	 	 	 	 	 	 	
 	Mining interests, net	 	 	(1,742	)	 	(1,499	)	 	
 	Provision for mine closure costs	 	 	449	 	 	420	 	 	
 	Mine restoration obligation	 	 	754	 	 	698	 	 	
	
Future mining tax liability, long-term	 	$	(539	)	$	(381	)	 	
	
At December 31, 2007, the Company had capital loss carry-forwards of approximately $3,700 (2006 – $5,100), which are available to reduce capital gains of future years.
At December 31, 2007, the Company and its subsidiary had non capital losses of approximately $30,900 (2006 – $37,500), of which $12,200 expires in 2015, $8,800 expires in 2026 and $9,900 expires in 2027. The tax benefit of these losses has not been recognized in the financial statements.
At December 31, 2007, the Company and its subsidiary had undepreciated capital cost allowance of approximately $254,000 (2006 – $278,000) available to offset future taxable income.
51

20.  STATEMENT OF CASH FLOWS
(a)
The net changes in non-cash working capital balances related to operations are as follows:

 	 	 	2007	 	 	2006	 	 	2005	 	 	
	
Cash provided by (used in):	 	 	 	 	 	 	 	 	 	 	 	
Concentrate awaiting settlement	 	$	(16,201	)	$	(44,194	)	$	29,406	 	 	
Inventories and stockpiles	 	 	(4,485	)	 	(3,727	)	 	3,484	 	 	
Other assets	 	 	20	 	 	(258	)	 	(729	)	 	
Accounts payable and accrued liabilities	 	 	(769	)	 	5,009	 	 	(3,839	)	 	
Taxes recoverable	 	 	83	 	 	(531	)	 	(135	)	 	
	
 	 	$	(21,352	)	$	(43,701	)	$	28,187	 	 	
	
(b)
Cash outflows during the year for interest and income taxes were as follows:

 	 	 	2007	 	 	2006	 	 	2005	 	
	
Interest paid on long-term debt	 	$	1,249	 	$	2,319	 	$	2,477	 	
Interest paid on obligations under capital leases	 	$	393	 	$	592	 	$	339	 	
Income and mining taxes paid	 	$	263	 	$	291	 	$	699	 	
	
(c)
The Series I and II convertible notes bear interest at a rate of 6.5% per annum payable bi-monthly. The interest payments may be paid to each Purchaser, at the Purchaser's option, in any combination of cash and/or common shares. During 2007, in a non cash transaction, the Purchaser's elected to receive common shares in settlement of their interest expense in the amount of $2,644 (2006 – $1,974; 2005 – $nil).

(d)
Principal repayments for the Series I and II convertible notes may be paid to each Purchaser, at the Purchaser's option, in any combination of cash and/or common shares. During 2007, in a non cash transaction, the Purchaser's elected to receive common shares in settlement of their principal repayments in the amount of $24,149 (2006 – $nil).

(e)
During 2007, mining interests were acquired at an aggregate cost of $15,346 (2006 – $19,384; 2005 – $41,998) of which $nil (2006 – $nil; 2005 – $6,583) were acquired by means of capital leases.
21.  SUBSEQUENT EVENTS
On January 9, 2008, the Company issued an additional 2,800,000 units under a 30-day overallotment option granted to the underwriters at an exercise price of US$4.00 per unit, for total gross proceeds of US$11.2 million. Kaiser-Francis also exercised its pre-existing right under the securities purchase agreement to subscribe for 25% of the overallotment units.
22.  COMPARATIVE FIGURES
Certain of the prior years' figures have been reclassified to conform to the presentation adopted in 2007.
52

 Exhibit 3

 
2116-130 Adelaide St. W.
Toronto, ON M5H 3P5
T. 416.360.7590
F. 416.360.7709
www.napalladium.com

For Immediate Release	News Release	
 
TSX: PDL, PDL.WT
AMEX:  PAL, PAL.WS
 
North American Palladium Announces Fourth Quarter and Year-End 2007
Financial Results
 
This news release contains forward-looking statements. Reference should be made to the cautionary
statement on forward-looking information at the end of this news release.
 
Highlights of 2007
 
·                        Revenue for the year increased by $36.7 million to $195.9 million, up 23% versus 2006.
 
·                        Operating cash flow for the year (before changes in non-cash working capital) 1  improved by $36.9 million to $46.8 million compared to operating cash flow of $9.9 million in 2006.
 
·                        The net loss for the year ended December 31, 2007 was $28.7 million or $0.51 per share compared to a net loss of $34.1 million or $0.65 per share in 2006.  The net loss for the year includes a net negative impact of $19.0 million (2006 – net negative impact $3.7 million) due to foreign exchange gains and losses.
 
·                        Palladium production increased by 21% to 286,334 ounces for the year ending December 31, 2007 versus production of 237,338 ounces the previous year.
 
·                        Palladium represented 47% of the year’s total revenues while platinum and nickel contributed 16% and 22% respectively.
 
·                        Total by-product revenues for the year increased by 25% to $104.1 million versus $83.6 million in 2006.
 
·                        Cash cost per ounce of palladium produced, 1  net of by-product metal revenues and royalties, was US$164 in 2007 compared to US$201 last year.
 
·                        North American Palladium completed an equity offering that resulted in total gross proceeds to the Company of approximately US$86 million, which will be used to advance its three platinum group metals (PGM) and nickel-copper projects.
 
TORONTO, March 19 – North American Palladium Ltd. announced today financial results for the fourth quarter and year ended December 31, 2007.
 
Revenue, after pricing adjustments, in the fourth quarter of 2007 was $46.5 million, lower than the fourth quarter of 2006 by $4.3 million due mainly to the negative foreign exchange impact from the continued strengthening of the Canadian dollar versus the US dollar.  For the year ended December 31, 2007, revenue after pricing adjustments was $195.9 million, an increase

1  Non-GAAP measure. Reference should be made to footnote 1 at the end of this Press Release.

 
of $36.7 million or 23%, compared to revenue of $159.2 million last year.
 
Palladium production for the quarter ended December 31, 2007 of 71,595 ounces was down slightly (2%) compared to 73,242 ounces the previous year and reflects increased scheduled maintenance downtime in the fourth quarter of 2007.  Palladium production for the year ended December 31, 2007 increased to 286,334 ounces, up 21% compared to the previous year.
 
Palladium sales in the fourth quarter of 2007 were recorded at an average price of US$364 per ounce versus an average price of US$322 in the same period in 2006. For the year ended December 31, 2007 palladium sales were recorded at an average price of US$356 per ounce, up 12%, compared to US$319 in 2006.
 
For the quarter ended December 31, 2007, cash cost per ounce 1  of palladium, net of by-product metal revenues, was US$223 per ounce versus US$108 in the same period last year and reflects primarily the negative impact of the strengthening Canadian dollar on by-product metal revenue.  For the year ended December 31, 2007 the cash cost per ounce 1  of palladium produced declined to US$164 per ounce compared with US$201 per ounce in 2006, reflecting the increase in production together with continued strength in by-product metal prices, partially offset by the strengthening Canadian dollar.
 
The Company recognized a loss from mining operations of $8.2 million in the fourth quarter of 2007 compared to income of $0.5 million in the same period last year.  The loss is due to lower revenue of $4.3 million, which includes a negative foreign exchange impact of $7.2 million, and increased operating costs due primarily to increased production costs ($1.0 million), smelting, refining and freight costs ($1.5 million) and amortization charges ($0.9 million).  The loss from mining operations for the year ended December 31, 2007 was $19.4 million, an increase of $1.3 million (7%), compared to the loss of $18.1 million last year.
 
The net loss for the quarter ended December 31, 2007 was $11.1 million or $0.19 per share compared to a loss of $7.4 million or $0.14 per share in the same period last year.  For the year ended December 31, 2007, the Company decreased its net loss to $28.7 million ($0.51 per share) from the 2006 loss of $34.1 million ($0.65 per share) despite a negative foreign exchange impact of $19.0 million (2006 negative impact of $3.7 million) due to strengthening of the Canadian dollar versus the US dollar.
 
Operating cash flow for the year (before changes in non-cash working capital) 1  improved by $36.9 million to $46.8 million compared to operating cash flow of $9.9 million in 2006.
 
Mr. Jim Excell, President and Chief Executive Officer said, “The consistent and improved production results are gratifying and supports our drive toward strengthening the Company’s financial position.  Having raised US$86 million in a recent financing, we are well-positioned to aggressively advance the Shebandowan West and the Offset High Grade Zone projects in Ontario, as well as the Arctic Platinum Project in Finland, towards production decisions.”  Mr. Excell added, “Since December 31, 2007 we have seen a significant increase in PGM prices, highlighting increased demand and growing supply concerns in South Africa.  If the prevailing metal prices are sustained, it can have a very positive impact on the Company’s 2008 financial performance.”

1  Non-GAAP measure. Reference should be made to footnote 1 at the end of this Press Release.

 
Outlook
 
Palladium production is expected to increase by approximately 5% for the year ended December 31, 2008 with an estimated total production of approximately 300,000 ounces.  The proportion of by-product metals produced is, in aggregate, expected to increase in tandem with palladium production.
 
A key strategy moving forward will be to continue the pursuit of opportunities to acquire good quality PGM-Ni-Cu projects.  The Company’s ambitious exploration program will continue in 2008, with an important component being the completion of a feasibility study for the Arctic Platinum Project in Finland.  In addition, a preliminary economic assessment of the Offset High Grade Zone at Lac des Iles is nearing completion and the Company anticipates releasing the results during the second quarter of 2008.  A preliminary economic assessment of the Shebandowan West Project is also anticipated in the second quarter of 2008 which evaluates a  ramp-accessed underground mine scenario.  Discussions are currently underway with Vale-Inco about the next steps for the Shebandowan joint venture.
 
Further information about the 2007 year-end results are available in the Company’s financial statements and MD&A, which will be filed on its website, with Canadian provincial securities authorities (www.sedar.com) and with the U.S. Securities and Exchange Commission (www.sec.gov).
 
Conference Call and Webcast
 
The Company will host its fourth quarter and year-end 2007 Conference Call and Webcast at 3:00 pm ET on Thursday March 20, 2008.  The toll-free conference call dial-in number is 1-866-226-1799 and the local and overseas dial-in number is 416-641-6125.  The conference call will be simultaneously webcast and archived at www.napalladium.com in the Investor Centre under Conference Calls. The webcast will also be available at www.vcall.com/IC/CEPage.asp?ID=126220.  A replay of the conference call will be available until April 3, 2008: toll-free at 1-800-408-3053; locally and overseas at 416-695-5800, access code #3253315.

1  Non-GAAP Measures
 
This management discussion and analysis refers to cash cost per ounce and operating cash flow which are not recognized measures under Canadian GAAP. Such non-GAAP financial measures do not have any standardized meaning prescribed by Canadian GAAP 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 for the current period and are a better indication 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 Canadian GAAP. The following tables reconcile these non-GAAP measures to the most directly comparable Canadian GAAP measure:

 
(a) Reconciliation of Cash Cost per Ounce to Financial Statements
 
(thousands of dollars except per ounce amounts)

 	 	Three months ended
December 31	 	Twelve months ended
December 31	 	
 	 	2007	 	2006	 	2007	 	2006	 	
Production costs including overhead	 	$	30,530	 	$	29,553	 	$	125,065	 	$	112,458	 	
Smelter treatment, refining and freight costs	 	5,939	 	4,488	 	22,444	 	15,438	 	
 	 	36,469	 	34,041	 	147,509	 	127,896	 	
Less by-product metal revenue	 	22,701	 	26,572	 	104,126	 	83,556	 	
 	 	13,768	 	7,469	 	43,383	 	44,340	 	
Divided by ounces of palladium	 	62,446	 	59,333	 	251,531	 	193,067	 	
Cash cost per ounce (C$)	 	220	 	126	 	172	 	230	 	
C$ exchange rate	 	0.988	 	1.165	 	1.050	 	1.141	 	
Cash cost per ounce (US$)	 	$	223	 	$	108	 	$	164	 	$	201	 	
 
(b) Reconciliation of Cash Flow from Operations, Prior to Changes in Non-Cash Working Capital
(Operating Cash Flow) to Financial Statements*

 	 	Three months ended
December 31	 	Twelve months ended
December 31	 	
 	 	2007	 	2006	 	2007	 	2006	 	
Operating cash flow	 	$	6,858	 	$	8,421	 	$	46,828	 	$	9,912	 	
Changes in non-cash working capital	 	3,663	 	(13,995	)	(21,352	)	(43,701	)	
Cash provided by operating activities	 	$	10,521	 	$	(5,574	)	$	25,476	 	$	(33,789	)	

    * Certain prior period amounts have been reclassified to conform to the classification adopted in the current period.
 
About North American Palladium
 
North American Palladium is one of North America’s largest producers of palladium.  The Company’s core palladium business at the Lac des Iles mine is strengthened by a significant contribution from platinum, nickel, gold and copper by-product metals.  The Company is actively progressing its three advanced exploration projects: the Offset High Grade Zone at its Lac des Iles mine, the Shebandowan West Project, located approximately 100 kilometers from the mine, and the Arctic Platinum Project in Finland.  Please visit www.napalladium.com for more information.
 
For further information please contact:
Fraser Sinclair
Vice President, Finance and Chief Financial Officer
(416) 360-7971 Ext. 222
Email: fsinclair@napalladium.com
 
Linda Armstrong
Director, Investor Relations
(416) 360-7971 Ext. 226
Email: larmstrong@napalladium.com

 
Forward-Looking Statements
 
Certain information included in this press release, including any information as to our future financial or operating performance and other statements that express management’s expectations or estimates of future performance, constitute ‘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. The words ‘expect’, ‘believe’, ‘will’, ‘intend’, ‘estimate’ and similar expressions identify forward-looking statements. Forward-looking statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable by management, are inherently subject to significant business, economic and competitive uncertainties and contingencies.  These statements are based on certain factors and assumptions, including but not limited to, the assumption that market fundamentals will result in increased palladium demand and prices and sustained by-product metal demand and prices; the integrated operation of the Company’s underground mine and the open pit mine remain viable operationally and economically; financing is available on reasonable terms; expectations for blended mill feed head grade and mill performance will proceed as expected; new mine plan scenarios will be viable operationally and economically; and plans for mill production, sustainable recoveries from the Lac des Iles mine, exploration at Lac des Iles and elsewhere will all proceed as expected.  The Company cautions the reader that such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual financial results, performance or achievements of North American Palladium to be materially different from the Company’s estimated future results, performance or achievements expressed or implied by those forward-looking statements and that the forward-looking statements are not guarantees of future performance. These risks, uncertainties and other factors include, but are not limited to: metal price volatility; economic and political events affecting metal supply and demand; changes in the regulatory environment; fluctuations in ore grade or ore tonnes milled; geological, technical, mining or processing problems; future production; changes in the life-of-mine plan or the ultimate pit design; availability and increasing costs associated with mining inputs and labour; the speculative nature of exploration and development, including the risks of diminishing quantities or grades of mineral reserves; adverse changes in our credit rating; and the risks involved in the exploration, development and mining business. These factors are discussed in greater detail in the Company’s most recent Form 40-F/Annual Information Form on file with the U.S. Securities and Exchange Commission and Canadian provincial securities regulatory authorities. The Company disclaims any obligation to update or revise any forward-looking statements, whether as a result of new information, events or otherwise. Readers are cautioned not to put undue reliance on these forward-looking statements.

 
North American Palladium Ltd.
Consolidated Balance Sheets
(expressed in thousands of Canadian dollars)

 	 	December 31	 	
 	 	2007	 	2006	 	
Assets	 	 	 	 	 	
Current Assets	 	 	 	 	 	
Cash	 	$	74,606	 	$	3,153	 	
Concentrate awaiting settlement, net	 	79,087	 	82,050	 	
Taxes recoverable	 	62	 	145	 	
Inventories	 	17,873	 	14,164	 	
Current portion of crushed and broken ore stockpiles	 	8,072	 	7,134	 	
Other assets	 	2,563	 	2,602	 	
 	 	182,263	 	109,248	 	
 	 	 	 	 	 	
Mining interests, net	 	114,464	 	146,617	 	
Mine restoration deposit	 	8,272	 	8,041	 	
Crushed and broken ore stockpiles	 	375	 	289	 	
Deferred financing costs	 	—	 	962	 	
 	 	$	305,374	 	$	265,157	 	
Liabilities and Shareholders’ Equity	 	 	 	 	 	
Current Liabilities	 	 	 	 	 	
Accounts payable and accrued liabilities	 	$	20,757	 	$	21,526	 	
Future mining tax liability	 	168	 	149	 	
Current portion of obligations under capital leases	 	1,672	 	2,104	 	
Current portion of convertible notes payable	 	25,710	 	22,148	 	
Current portion of long-term debt	 	5,918	 	6,662	 	
Kaiser-Francis credit facility	 	—	 	5,827	 	
 	 	54,225	 	58,416	 	
 	 	 	 	 	 	
Mine restoration obligation	 	8,878	 	8,211	 	
Obligations under capital leases	 	1,824	 	4,111	 	
Convertible notes payable	 	—	 	23,062	 	
Long-term debt	 	3,957	 	10,992	 	
Future mining tax liability	 	539	 	381	 	
 	 	69,423	 	105,173	 	
Shareholders’ Equity	 	 	 	 	 	
Common share capital and common share purchase warrants	 	443,986	 	339,743	 	
Stock options	 	1,673	 	1,269	 	
Equity component of convertible notes payable, net of issue costs	 	6,044	 	12,336	 	
Contributed surplus	 	6,292	 	—	 	
Deficit	 	(222,044	)	(193,364	)	
Total shareholders’ equity	 	235,951	 	159,984	 	
 	 	 	 	 	 	
 	 	$	305,374	 	$	265,157	 	
 
These financial statements should be read in conjunction with the notes and management’s discussion and analysis, available on online at www.sedar.com, www.sec.gov and on the Company’s website.

 
North American Palladium Ltd.
Consolidated Statements of Operations, Comprehensive Loss and Deficit
(expressed in thousands of Canadian dollars, except share and per share amounts)

 	 	Three months	 	Year	 	
 	 	ended	 	ended	 	
 	 	December 31	 	December 31	 	
 	 	2007	 	2006	 	2007	 	2006	 	
 	 	 	 	 	 	 	 	 	 	
Revenue - before pricing adjustments	 	$	44,938	 	$	46,061	 	$	201,367	 	$	145,819	 	
Pricing adjustments – commodities	 	1,799	 	1,229	 	8,756	 	11,674	 	
Pricing adjustments – foreign exchange	 	(231	)	3,468	 	(14,191	)	1,707	 	
Revenue - after pricing adjustments	 	46,506	 	50,758	 	195,932	 	159,200	 	
Operating expenses	 	 	 	 	 	 	 	 	 	
Production costs, excluding amortization and asset retirement costs	 	30,530	 	29,553	 	125,065	 	112,458	 	
Smelter treatment, refining and freight costs	 	5,939	 	4,488	 	22,444	 	15,438	 	
Amortization	 	10,876	 	9,964	 	46,908	 	30,103	 	
Administrative	 	2,061	 	1,509	 	7,773	 	6,734	 	
Exploration	 	5,179	 	4,572	 	12,138	 	11,831	 	
Loss on disposal of equipment	 	—	 	—	 	—	 	194	 	
Asset retirement costs	 	160	 	165	 	1,010	 	554	 	
Total operating expenses	 	54,745	 	50,251	 	215,338	 	177,312	 	
Loss from mining operations	 	(8,239	)	507	 	(19,406	)	(18,112	)	
Other income (expenses)	 	 	 	 	 	 	 	 	 	
Interest and other financing costs	 	(3,162	)	(5,601	)	(18,633	)	(15,647	)	
Foreign exchange gain (loss)	 	271	 	(2,359	)	8,422	 	(1,759	)	
Total other income (expenses)	 	(2,891	)	(7,960	)	(10,211	)	(17,406	)	
 	 	 	 	 	 	 	 	 	 	
Loss before income taxes	 	(11,130	)	(7,453	)	(29,617	)	(35,518	)	
Income tax recovery	 	(42	)	(57	)	(937	)	(1,409	)	
Net loss and comprehensive loss for the period	 	(11,088	)	(7,396	)	(28,680	)	(34,109	)	
Deficit, beginning of period	 	(210,956	)	(185,968	)	(193,364	)	(159,255	)	
Deficit, end of period	 	$	(222,044	)	$	(193,364	)	$	(222,044	)	$	(193,364	)	
 	 	 	 	 	 	 	 	 	 	
Loss per share	 	 	 	 	 	 	 	 	 	
Basic	 	$	(0.19	)	$	(0.14	)	$	(0.51	)	$	(0.65	)	
Diluted	 	$	(0.19	)	$	(0.14	)	$	(0.51	)	$	(0.65	)	
Weighted average number of shares outstanding	 	 	 	 	 	 	 	 	 	
Basic	 	60,250,864	 	52,902,051	 	55,792,203	 	52,562,939	 	
Diluted	 	60,250,864	 	52,902,051	 	55,792,203	 	52,562,939	 	
 
These financial statements should be read in conjunction with the notes and management’s discussion and analysis, available on online at www.sedar.com, www.sec.gov and on the Company’s website.

 
North American Palladium Ltd.
Consolidated Statements of Cash Flows
(expressed in thousands of Canadian dollars )

 	 	Three Months ended	 	Year ended	 	
 	 	December 31	 	December 31	 	
 	 	2007	 	2006	 	2007	 	2006	 	
Cash provided by (used in)	 	 	 	 	 	 	 	 	 	
Operations	 	 	 	 	 	 	 	 	 	
Loss for the period	 	$	(11,088	)	$	(7,396	)	$	(28,680	)	$	(34,109	)	
Operating items not involving cash	 	 	 	 	 	 	 	 	 	
Accretion expense relating to convertible notes payable	 	2,291	 	3,938	 	12,947	 	10,090	 	
Amortization	 	10,876	 	9,964	 	46,908	 	30,103	 	
Amortization of deferred financing costs	 	135	 	208	 	751	 	1,090	 	
Interest on convertible notes settled in shares	 	636	 	1,032	 	2,644	 	1,974	 	
Accrued interest on mine restoration deposit	 	(121	)	(110	)	(231	)	(194	)	
Unrealized foreign exchange loss (gain)	 	3,691	 	(263	)	10,779	 	(822	)	
Asset retirement costs	 	160	 	165	 	1,010	 	554	 	
Future income tax recovery	 	(42	)	530	 	(937	)	(739	)	
Stock based compensation and employee benefits	 	320	 	353	 	1,637	 	1,771	 	
Loss on disposal of equipment	 	—	 	—	 	—	 	194	 	
 	 	6,858	 	8,421	 	46,828	 	9,912	 	
Changes in non-cash working capital	 	3,663	 	(13,995	)	(21,352	)	(43,701	)	
 	 	10,521	 	(5,574	)	25,476	 	(33,789	)	
Financing Activities	 	 	 	 	 	 	 	 	 	
Advances (settlements) under purchase facility	 	(3,990	)	—	 	—	 	—	 	
Issuance of common shares	 	69,615	 	2	 	75,318	 	3,955	 	
Repayment of long-term debt	 	(1,478	)	(1,660	)	(12,016	)	(6,566	)	
Repayment of obligations under capital leases	 	(417	)	(548	)	(1,979	)	(2,278	)	
Mine restoration deposit	 	—	 	—	 	—	 	(600	)	
Issuance of convertible notes	 	—	 	—	 	—	 	41,037	 	
Increase in long term debt and credit facility	 	—	 	5,800	 	—	 	8,111	 	
Deferred financing costs	 	—	 	—	 	—	 	(2,364	)	
 	 	63,730	 	3,594	 	61,323	 	41,295	 	
Investing Activities	 	 	 	 	 	 	 	 	 	
Additions to mining interests	 	(3,799	)	(4,228	)	(15,346	)	(19,384	)	
 	 	(3,799	)	(4,228	)	(15,346	)	(19,384	)	
Increase (decrease) in cash and cash equivalents	 	70,452	 	(6,208	)	71,453	 	(11,878	)	
Cash and cash equivalents, beginning of period	 	4,154	 	9,361	 	3,153	 	15,031	 	
Cash and cash equivalents, end of period	 	$	74,606	 	$	3,153	 	$	74,606	 	$	3,153	 	
 	 	 	 	 	 	 	 	 	 	
Cash and cash equivalents consisting of:	 	 	 	 	 	 	 	 	 	
Cash	 	$	4,444	 	$	3,153	 	$	4,444	 	$	3,153	 	
Short-term investments	 	70,162	 	—	 	70,162	 	—	 	
 	 	$	74,606	 	$	3,153	 	$	74,606	 	$	3,153	 	
 
These financial statements should be read in conjunction with the notes and management’s discussion and analysis, available on online at www.sedar.com, www.sec.gov and on the Company’s website.

 
North American Palladium Ltd.
Consolidated Statements of Shareholders’ Equity
(expressed in thousands of Canadian dollars, except share amounts)

 	 	Number of
shares	 	Capital
stock	 	Stock
options	 	Warrants	 	Equity
component of convertible
notes payable	 	Contributed
surplus	 	Deficit	 	Total shareholder’s equity	 	
Balance, December 31, 2006	 	52,947,693	 	$331,705	 	$1,269	 	$8,038	 	$12,336	 	$—	 	$(193,364	)	$159,984	 	
Common shares issued:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
For principal repayments on convertible notes payable	 	3,120,997	 	26,180	 	—	 	—	 	(6,292	)	6,292	 	—	 	26,180	 	
For interest payments on convertible notes payable	 	341,528	 	2,644	 	—	 	—	 	—	 	—	 	—	 	2,644	 	
Private placement of flow- through shares (net)	 	550,000	 	5,686	 	—	 	—	 	—	 	—	 	—	 	5,686	 	
Tax effect of flow-through shares	 	—	 	(1,114	)	—	 	—	 	—	 	—	 	—	 	(1,114	)	
Pursuant to unit offering, net of issue costs	 	18,666,667	 	64,461	 	—	 	—	 	—	 	—	 	—	 	64,461	 	
Warrants Issued:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Pursuant to unit offering, net of issue costs	 	—	 	—	 	—	 	5,155	 	—	 	—	 	—	 	5,155	 	
Stock options exercised	 	5,000	 	17	 	—	 	—	 	—	 	—	 	—	 	17	 	
Fair value of stock options exercised	 	—	 	10	 	(10	)	—	 	—	 	—	 	—	 	—	 	
Stock-based compensation expense	 	138,685	 	1,204	 	414	 	—	 	—	 	—	 	—	 	1,618	 	
Net loss for the year ended December 31, 2007	 	—	 	—	 	—	 	—	 	—	 	—	 	(28,680	)	(28,680	)	
Balance, December 31, 2007	 	75,770,570	 	$430,793	 	$1,673	 	$13,193	 	$6,044	 	$6,292	 	$(222,044	)	$235,951	 	
 
These financial statements should be read in conjunction with the notes and management’s discussion and analysis, available on online at www.sedar.com, www.sec.gov and on the Company’s website.