**Exhibit1.4**

 

 
| **KPMG**  LLP                      |   |                                           |   |   |
|------------------------------------|--------|------------------------------------------------|--------|--------|
| **Chartered  Accountants**         |   | Telephone (416)  228-7000                      |
| Yonge Corporate  Centre            |   | Telefax    (416)  228-7123 |
| 4100 Yonge  Street, Suite 200 |   | www.kpmg.ca                                    |
| North York, ON  M2P 2H3            |   |                                           |

 

**AUDITORS’REPORT ON RECONCILIATION TO UNITED STATES GAAP**

** **

To the Board ofDirectors****of North American Palladium Ltd.

 

On March 28,2008, we reported on the consolidated balance sheets of North AmericanPalladium Ltd. (“the Company”) as at December 31, 2007 and 2006 and theconsolidated statements of operations, comprehensive loss and deficit and cashflows and shareholders’ equity for each of the years in the three-year period ended December 31,2007 which are included in the annual report on Form 40-F. In connectionwith our audits of the aforementioned consolidated financial statements, wealso have audited the related supplemental note entitled “Reconciliation toAccounting Principles Generally Accepted in the United States” included in the Form 40-F.This supplemental note is the responsibility of the Company’s management.Our responsibility is to express an opinion on this supplementalnote based on our audits.

 

In our opinion,such supplemental note, when considered in relation to the basic consolidatedfinancial statements taken as a whole, presents fairly, in all materialrespects, the information set forth therein.

 

 

CharteredAccountants, Licensed Public Accountants

 

Toronto, Canada

March 28,2008

 

----

** **

 

**Reconciliation to AccountingPrinciples Generally Accepted in the United States.**

 

The Company’s consolidatedfinancial statements for the three years ended December 31, 2007, 2006 and2005 have been prepared in accordance with Canadian generally acceptedaccounting principles (“Canadian GAAP”), which differ in some respects fromthose in the United States. The following table presents amounts that wouldhave been reported had the Company’s consolidated financial statements beenprepared on the basis of accounting principles generally accepted in the UnitedStates (“U.S. GAAP”):

 

(Canadian funds inthousands of dollars, except per share amounts)

 
| ** **                                                                            | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Statements of  loss and deficit:                                                      |       |     |       |     |       |     |       |
|                                                                                  |       |     |       |     |       |     |       |
| Loss under  Canadian GAAP                                                             |       | $        | (28,680    | )        | $          | (34,109  | )          | $ | (53,611 | ) |
| Capitalized  interest (a)                                                             |       | —   |       | 603      |       | 1,089    |       |
| Amortization of  capitalized interest (a)                                             |       | (493     | )          | (446     | )          | (62      | )          |
| Concentrates and  crushed and broken ore stockpiles (b)                               |       | —   |       | —   |       | (2,944   | )          |
| Derivative  financial instruments (c)                                                 |       | —   |       | 277      |       | 475      |       |
| Tax liability on  flow-through financing (e)                                          |       | (161     | )          | (143     | )          | (1,116   | )          |
| Accretion  expense relating to convertible notes (h)                                  |       | (1,571   | )          | (255     | )          | —   |       |
| Amortization of  deferred financing costs (h)                                         |       | (497     | )          | (353     | )          | —   |       |
| Fair value  adjustment on embedded derivatives and common share purchase warrants (h) |       | 6,978    |       | 15,148   |       | —   |       |
|                                                                                  |       |     |       |     |       |     |       |
| Loss and  comprehensive loss under U.S. GAAP                                          |       | $        | (24,424    | )        | $          | (19,278  | )          | $ | (56,169 | ) |
| Basic and  diluted loss per share under U.S. GAAP                                     |       | $        | (0.44      | )        | $          | (0.37    | )          | $ | (1.08 | ) |

 

----

 

Balance sheets:

 
| ** **                                                           | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                                           | ** ** | **$**    | ** ** | **$**    | ** ** |
| Current assets  (b) and (c)                                     |       | 182,263  |       | 109,248  |       |
| Mining interests  (a)                                                |       | 115,713  |       | 148,390  |       |
| Crushed and  broken ore stockpiles – long term (b)              |       | 375      |       | 289      |       |
| Deferred  financing costs (h)                                        |       | 275      |       | 1,576    |       |
| Future tax  liability (e)                                            |       | 2,714    |       | 2,662    |       |
| Liabilities –  current portion of convertible notes payable (h) |       | 25,706   |       | 20,992   |       |
| – convertible  notes payable (h)                                |       | —   |       | 22,516   |       |
| – embedded  derivatives (h)                                     |       | 209      |       | 3,702    |       |
| – common share  purchase warrants (h)                           |       | 995      |       | 4,479    |       |
| Common share  capital and common share purchase warrants (d),(e),(h) |       | 440,751  |       | 336,440  |       |
| Equity component  of convertible notes payable (h)                   |       | —   |       | —   |       |
| Contributed  surplus                                                 |       | 1,673    |       | 1,269    |       |
| Deficit  (d),(e),(h)                                                 |       | (208,863 | )          | (184,439 | )          |

 

----

*(a) *UnderCanadian GAAP, the Company capitalizes interest on major projects where directindebtedness has occurred and commences amortization upon reaching commercialproduction. Under U.S. GAAP, interest is capitalized as it arises fromindebtedness incurred, directly or indirectly, to finance development andconstruction activities on assets that are not yet subject to amortization ordepletion. For 2007, interest of $nil (2006 - $603; 2005 – $1,089),respectively, has been capitalized related to the investment in the undergrounddevelopment, which reached commercial production during the first quarter of2006.  Upon the underground mine reachingcommercial production, the Company commenced amortization of interestcapitalized for the underground development, in addition to the amortization ofinterest amounts previously capitalized under U.S. GAAP.

 

*(b) *Thecost of the Company’s concentrate inventory and crushed and broken orestockpiles is determined using the average production costs including anallocation of the amortization of production related assets. At December 31,2007 and 2006, the Company recorded its concentrate inventory and crushed andbroken ore stockpiles at their net realizable value. Amounts adjusted underU.S. GAAP for 2005, include amounts previously included in the cost of theseinventories under U.S. GAAP for periods prior to January 1, 2004, the datethe Company commenced including amortization in the cost of inventories underCanadian GAAP.

 

*(c) *UnderU.S. GAAP, the Company has chosen not to designate its derivative financialinstruments as hedging instruments and thus they are carried on the balancesheet at their fair value and any changes in fair value are being recorded toearnings in the period of the change. The Company did not have any derivative financial instruments designatedas hedges under Canadian GAAP as at December 31, 2007 and 2006.

 

----

 

*(d) *CanadianGAAP allows for the reduction of the stated capital of outstanding commonshares with a corresponding offset to deficit. This reclassification, which theCompany made in 1991, is not permitted by U.S. GAAP and would result in anincrease in both capital stock and deficit of $6,098 as at December 31,2007 and 2006.

 

*(e)*UnderU.S. GAAP, the renunciation of tax deductions to holders of flow-through sharesis treated as a future tax expense rather than as a cost of issuing equity asrequired by Canadian GAAP.

 

*(f)*U.S.GAAP requires that amounts totaling 5% or more of current liabilities beidentified separately. As at December 31, 2007, these amounts were asfollows: trade payables and accruals - $15,494 (2006 - $17,141); other accruals- $5,263 (2006 - $4,385).

 

*(g)*U.S.GAAP does not permit the disclosure of subtotal of cash from operations beforechanges in non-cash working capital.

 

*(h) *Under Canadian GAAP, the components of the convertible notespayable must be bifurcated and accounted for separately as debt and equityinstruments. The attached warrants are separable from the convertible notes andare accounted for as an equity instrument. The Company allocated the grossproceeds received to the debt and equity components of the notes and thewarrants on a relative fair value basis. The Series I proceeds receivedwere allocated as follows; US$20,558 to the debt, US$8,808 to the equitycomponent and US$5,634 to the warrants. The Series II proceeds wereallocated as follows: US$9,578 to the debt, US$2,312 to the equity componentand US$1,610 to the warrants. Issuance costs of $2,364 were allocated pro-ratato the debt ($1,398) and equity components ($589) and to the associatedwarrants ($377) on a relative fair value basis. The issuance costs related tothe debt components are being amortized over the respective terms of theconvertible notes on an effective yield basis (Series I- 42%; Series II-28%).In addition, a liability(the “Equity Premium”) was recognized for the holders’ option to receive commonshares, in lieu of cash, at a 10% discount to the five day weighted tradingprice for interest and principal payments. The Company will be required to accrete the carrying value of theconvertible notes and the Equity Premium such that at each installment paymentdate, the carrying value of the notes and the Equity Premium will be equal tothe face value of the notes and the liability related to the Equity Premium. Forthe year ended December 31, 2007, theCompany recorded accretion expense of $12,947 (2006 - $10,090) of which $3,245(2006 - $2,160) represented the accretion relating to the Equity Premium whichwas included in the carrying value of the convertible notes payable as at December 31,2007.

 

Under U.S. GAAP, anembedded derivative included in a debt arrangement for which the economiccharacteristics and risks are not clearly and closely related to the economiccharacteristics of the debt host contract must be measured at fair value andpresented as a liability. Changes in fair value of the embedded derivatives arerecorded in the consolidated statements of loss and deficit at each reportingdate. Embedded derivatives that meet the criteria for bifurcation from theconvertible notes payable and that are 

 

----

 

measured at fair valueconsist of the holders’ conversion right, the Company’s contingent conversionoption and the holders’ contingent redemption and conversion rights in theevent of a change in control or an event of default. Under Canadian GAAP, thereis no requirement to identify and measure the other embedded derivatives.

 

Under U.S. GAAP, thecommon share warrants are presented as a liability and subsequent changes infair value are recorded in the consolidated statements of loss and deficit ateach reporting date.

 

Under U.S. GAAP theCompany allocated the residual amount of the gross proceeds received to theconvertible notes payable after the separate fair value measurement of thewarrants and embedded derivatives. The Company allocated the Series Iproceeds as follows: US$18,504 to the debt, US$10,060 to the embeddedderivatives and US$6,436 to the warrants. The Company allocated the Series IIproceeds as follows: US$9,952 to the debt, US$2,092 to the embedded derivativesand US$1,456 to the warrants.

 

All of the issuance costsrelated to the convertible note issuances are recognized as deferred financingcosts under U.S. GAAP and are amortized to the consolidated statements of lossand deficit using the effective yield basis over the respective terms of thenotes. The Series I notes and Series II note carry an effective yieldof 49% and 25%, respectively.

 

Differences in U.S. GAAPand Canadian GAAP result from the initial allocation differences and thesubsequent accretion expenses, amortization of deferred financing costs andfrom the fair value re-measurement of the warrant and embedded derivatives asliabilities each reporting period under U.S.GAAP.

 

**Adoption of new United Statesaccounting pronouncements**

 

In November 2004,the Financial Accounting Standards Board (“FASB”) issued FAS No. 151, whichclarifies the accounting for abnormal amounts of idle facility expense,freight, handling costs and wasted material as they relate to inventory costingand requires these items to be recognized as current period expenses.  Additionally, the allocation of fixedproduction overheads to the cost of inventory should be based on the normalcapacity of the production facilities. The adoption of FAS No. 151 on January 1, 2006 by the Companyhad no material impact on the consolidated financial statements.

 

In December 2004,FAS No. 123 (revised) “Share-Based Payment”, was issued.  This statement requires an entity torecognize the grant date fair value of stock options and other equity-basedcompensation issued to employees.  In theincome statement, FAS No. 123 (revised) eliminates the ability to accountfor share-based compensation transactions using the intrinsic value method inAPB No. 25.  The adoption of FAS No. 123(revised) on January 1, 2006 by the Company, using the modifiedprospective application method, had no material impact on the consolidatedfinancial statements.

 

----

 

Under Canadian GAAP the Company has adopted a policy of recognizingforfeitures as they occur.  Under US GAAP forfeitures must be estimated inadvance.  Management has estimated that the impact of estimatingforfeitures in advance has no material impact on compensation expense comparedto Canadian GAAP.

 

In May 2005, theFASB issued FAS No. 154, “Accounting Changes and Error Corrections, aReplacement of APB Opinion No. 20 and FAS No. 3”.  FAS No. 154 requires retrospectiveapplication of changes in accounting principle to prior periods’ financialstatements, rather than the use of the cumulative effect of a change inaccounting principle, unless impracticable. If impracticable to determine the impact on prior periods, then the newaccounting principle should be applied to the balances of assets andliabilities as of the beginning of the earliest period for which retrospectiveapplication is practicable, with a corresponding adjustment to equity, unlessimpracticable for all periods presented, in which case prospective treatmentshould be applied.  FAS No. 154applies to all voluntary changes in accounting principle as well as thoserequired by the issuance of new accounting pronouncements if no specifictransition guidance is provided.  FASNo.154 does not change the previously issued guidance for reporting a change inaccounting estimate or correction of an error. The adoption of FAS No. 154 on January 1, 2006 by the Companyhad no material impact on the consolidated financial statements.

 

In March 2005, theFASB ratified EITF 04-06 “Accounting for Stripping Costs in the Mining Industry”.  The consensus reached is that stripping costsincurred during the production phase of a mine are variable production coststhat should be included in the costs of the inventory produced during theperiod that the stripping costs are incurred. EITF 04-06 is effective for the first reporting period in fiscal yearsbeginning after December 15, 2005 with early adoption permitted. Theadoption of EITF 04-06 on January 1, 2006 by the Company had no materialimpact on the consolidated financial statements

 

**Impact of recently issued United States accountingpronouncements**

 

Statement ofFinancial Accounting Standards No. 157, “Fair Value Measurement” (“SFAS157”) was issued September 2006. The Statement provides guidance for using fair value to measure assetsand liabilities.  The Statement alsoexpands disclosures about the extent to which companies measure assets andliabilities at fair value, the information used to measure fair value, and theeffect of fair value measurement on earnings. This Statement applies underother accounting pronouncements that require or permit fair value measurements.  This Statement does not expand the use offair value measurements in any new circumstances.  Under this Statement, fair value refers tothe price that would be received to sell an asset or paid to transfer aliability in an orderly transaction between market participants in the marketin which the entity transacts.  SFAS 157is effective for the Company for fair value measurements and disclosures madeby the Company in its fiscal year beginning on January 1, 2008.  The Company is currently reviewing the impactof this statement.

 

----

 

In February 2007, the FASB issued FASBStatement No. 159, The Fair Value Option for Financial Assets andFinancial Liabilities.  This statement permits entities the option tomeasure financial instruments at fair value, thereby achieving an offsettingeffect for accounting purposes for certain changes in fair value of certainrelated assets and liabilities without having to apply hedge accounting. Thisstatement is effective for the Company beginning January 1, 2008. The Company is currently assessing the impact of this new standard on itsconsolidated financial statements.

 

FASBInterpretation No.48 “Accounting for Uncertainty in Income Taxes – aninterpretation of FASB Statement 109” (“FIN 48”) was issued in June 2006.FIN 48 clarifies the accounting for uncertainty in income taxes recognized inan enterprise’s financial statements in accordance with FASB Statement No. 109,“Accounting for Income Taxes”. FIN 48 prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return. FIN 48 alsoprovides guidance on de-recognition, classification, interest and penalties,accounting in interim periods, disclosure, and transition requirements. Theadoption of FIN 48 on January 1, 2007 had no material impact on theconsolidated financial statements of the Company.

 

----