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Brookfield prepared to exit stake in North American Palladium as metal soars

People walk to Brookfield Place off Bay Street in Toronto.

Mark Blinch/Reuters

Brookfield Asset Management Inc. is laying the groundwork for the possible sale of one of the world's only dedicated palladium companies even as prices for the metal used in car pollution control devices soar.

Canada's largest alternative asset manager is the majority owner of North American Palladium Ltd., whose main asset is a mine near Thunder Bay, Ontario with reserves of 21 million metric tons. Brookfield's involvement began in 2013 when the company almost collapsed amid a poorly conceived expansion.

What began as a $130-million loan became a 92 per cent equity stake after the company's situation deteriorated further and it failed to find a buyer. Since then, North American Palladium has redesigned the asset and managed to post its first quarterly profit in six years as prices of the precious metal rallied.

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Asked if Brookfield intends to hold the asset to reap rewards over the long term, Brookfield Managing Partner Peter Gordon, who is chairman of the board at Northern American Palladium, suggested the firm would look to exit once its strategy is achieved.

"We're disciplined investors," he said in an interview this week. "When the turnaround is complete and we feel the company's value is fairly reflected in the share price, we'll consider our opportunities and alternatives."

The objectives Brookfield set out for North American Palladium two years ago – namely getting production up to the mill's capacity and having a long-term plan for the mine site – will largely be completed this year, he said.

Meanwhile, Brookfield has been encouraging Chief Executive Officer Jim Gallagher to get the message out to investors who are still wary after the company's near collapse and given the small 8 per cent free float.

"A number of investors were burnt obviously in 2015 with the restructuring," Gallagher said in the interview. "There's a lot of baggage out there and we're just now back talking to people."

Those talks included a road show this past June, he said.

Palladium – used to help clean exhaust gases in gasoline engines – is the best-performing major metal this year, with a 38 per cent jump. Demand for such engines has soared in the wake of Volkswagen AG's diesel-emissions scandal.

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Shares Underperform North American Palladium shares have gained just 10 per cent this year and are largely unchanged since Brookfield took over. Its market value is C$343-million ($280-million). As the Toronto-based company posts some good headlines going forward, "I think you're going to see some life in our share price," Gallagher said.

Both men expect palladium prices to remain high as demand continues to outstrip supply, with Europe increasingly moving away from diesel engines in favor of gasoline and the electric-car revolution still in its infancy. Gallagher said hybrid cars still require as much palladium, or more, as those powered by traditional engines.

Asked if higher prices, combined with North American Palladium's restructuring, could make the company a takeover target, Gordon said it's a fair question. "This is a terrific asset and should generate a lot of interest within the mining industry today."

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