Exhibit 1.1  NORTH AMERICAN PALLADIUM LTD.  ANNUAL INFORMATION FORM  FOR THE YEAR
ENDED DECEMBER 31, 2008  DATED MARCH 16,
2009


TABLE OF CONTENTS  PageFORWARD-LOOKING
  STATEMENTS
  1IMPERIAL-METRIC
  CONVERSION TABLE
  3REPORTING
  CURRENCY, FINANCIAL AND RESERVE INFORMATION
  3CORPORATE
  STRUCTURE
  4DESCRIPTION
  OF THE BUSINESS AND GENERAL DEVELOPMENTS
  5Three-year
  History
  5Business
  Overview
  8Principal Market of Platinum Group Metals
  9Lac des Iles Property
  10Shebandowan West Project
  11Arctic Platinum Project
  12Corporate Development and Grassroots Exploration
  13Mineral
  Reserve and Mineral Resource Estimates
  13MINERAL
  PROPERTIES
  14Lac
  des Iles Mine
  14Overview
  14Offset High Grade Zone
  19Project Description and Location
  19Accessibility, Climate, Local Resources,
  Infrastructure and Physiography
  20History
  21Geological Setting
  22Exploration
  23Mineralization
  23Drilling
  24Sampling, Analysis and Security
  24Mineral Reserve and Mineral Resource Estimates
  25Shebandowan
  West Project
  25Overview
  25Project Description and Location
  26Accessibility, Climate, Local Resources,
  Infrastructure and Physiography
  26History
  27Geological Setting
  28Exploration
  28Mineralization
  29Drilling
  31Sampling, Analysis and Security
  32Mineral Resource Estimates
  33Corporate
  Development and Grassroots Exploration
  33FINANCING
  33Senior Credit Facilities
  33KFOC Credit Facilities
  34Convertible Note Financing
  34Public Offering
  35Palladium and Platinum Purchase Agreement
  36DIVIDENDS
  36CAPITAL
  STRUCTURE
  36PRICE
  RANGE AND TRADING VOLUME
  38DIRECTORS
  AND EXECUTIVE OFFICERS
  39  i


TABLE OF CONTENTS (continued)  PageCease Trade Orders, Bankruptcies, Penalties or
  Sanctions
  42Conflicts of Interest
  42LEGAL
  PROCEEDINGS
  42INTERESTS
  OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
  43TRANSFER
  AGENT
  44MATERIAL
  CONTRACTS
  44INTERESTS
  OF EXPERTS
  44RISK
  FACTORS
  44AUDIT
  COMMITTEE INFORMATION
  54Audit Committee Mandate
  54Composition of the Audit Committee
  54Relevant Education and Experience
  54Reliance on Certain Exemptions
  55Audit Committee Pre-Approval Policies and Procedures
  55External Auditor Service Fees
  55ADDITIONAL
  INFORMATION
  56AUDIT
  COMMITTEE MANDATE
  57GLOSSARY
  OF TERMS
  61  ii


FORWARD-LOOKING STATEMENTS  This Annual Information Form (AIF) contains forward-looking
statements, which include future-oriented financial information, within the
meaning of the safe harbor provisions of the U.S. Private
Securities Litigation Reform Act of 1995 and the securities
legislation of certain of the provinces of Canada, including the Securities Act (Ontario). Forward-looking
statements, including future-oriented financial information, are necessarily
based on estimates and assumptions made by North American Palladium Ltd. (the Company)
in light of its experience and perception of historical trends, current conditions
and expected future developments, as well as other factors it believes are
appropriate in the circumstances. These estimates and assumptions are
inherently subject to significant business, economic, competitive and other
uncertainties and contingencies, many of which, with respect to future events,
are subject to change. These uncertainties and contingencies can affect actual
results and could cause actual results to differ materially from those
expressed or implied in any forward-looking statements made by the Company, or
on its behalf.  In making the forward-looking statements, including future-oriented
financial information, in this AIF, the Company has made several assumptions
that it believes are appropriate, including, but not limited to, the assumptions that:  ·
  
  placing the Lac des Iles mine on care and maintenance is temporary
  and the mine will eventually resume operations;·
  
  the mine would remain viable operationally and economically if and
  when market prices for palladium, platinum and other metals produced at the
  mine return to historical averages;·
  
  the expectations for mill feed head grade and mill performance will
  proceed as expected if and when the mine resumes operations;·
  
  the plans for mill production, sustainable recoveries from the Lac
  des Iles mine, exploration at Lac des Iles and elsewhere will all proceed as
  expected if and when metal prices return to historical averages;·
  
  market fundamentals will result in reasonable demand and prices for
  palladium and by-product metals in the future;·
  
  the Company will not be subject to any environmental disasters,
  significant litigation, significant regulatory changes or significant labour
  disruptions;·
  
  the advice the Company has received from its consultants and advisors
  relating to matters such as mineral resource and mineral reserve estimates,
  metallurgy, permitting and environmental matters is reliable and correct and,
  in particular, that the models, dilution strategies and mining recovery
  estimates used to calculate mineral resources and mineral reserves are
  appropriate and accurate; and·
  
  financing will be available on reasonable terms.  The Company cannot assure you that any of these assumptions will prove
to be correct.  The words expect, anticipate, estimate, may, will, should, intend,
believe, target, budget, plan, projection and similar expressions are
intended to identify forward-looking statements. Information concerning mineral
reserve and mineral resource estimates also may be considered forward-looking
statements, as such information constitutes a prediction of what mineralization
might be found to be present if and when a project is actually developed.  In light of the risks and uncertainties inherent in all forward-looking
statements, including future-oriented financial information, the inclusion of
forward-looking statements in this AIF should not be considered as


a representation by the Company or any other person that its objectives
or plans will be achieved. Numerous factors could cause the Companys actual
results to differ materially from those in the forward-looking statements,
including the following, which are discussed in greater detail under the
heading Risk Factors:  ·
  
  a prolonged shut-down of the Companys Lac des Iles mine;·
  
  continuing weak commodity prices or fluctuations in commodity prices;·
  
  the state of the global economy and economic and political events,
  including the deterioration of the global capital markets, affecting metal
  supply and demand;·
  
  fluctuations in foreign currency exchange rates, particularly the
  Canadian dollar/U.S. dollar exchange rate;·
  
  the ability of the Company to meet operating cost estimates;·
  
  the accuracy of mineral resource and mineral reserve estimates;·
  
  demand for, and cost of, exploration, development and construction
  services and equipment;·
  
  risks related to future exploration programs, including the risk that
  future exploration will not replace mineral resources and mineral reserves
  that are depleted in the Lac des Iles mine;·
  
  risks of acquisitions and the failure to integrate
  acquired mining properties;·
  
  the Companys history of losses and the possibility of future losses;·
  
  inherent risks and hazards associated with mining and processing
  operations;·
  
  failure to maintain projected production levels;·
  
  potential uncertainty related to title to the Companys mineral
  properties;·
  
  changes in the life-of-mine plan;·
  
  the Companys dependence on a third party for smelting and refining
  its metal;·
  
  competition for exploration, development and construction services
  and equipment;·
  
  the ability of the Company to obtain external financing to explore
  and develop its properties;·
  
  employment disruptions, including the failure to renew on acceptable
  terms or at all the collective agreement between the Company and the employee
  union;·
  
  costs of complying with environmental, health and safety laws and
  regulations;·
  
  costs of complying with other government regulations;·
  
  the risk that permits and regulatory approvals necessary to develop
  and operate mines on the Companys properties will not be available on a
  timely basis, on reasonable terms or at all;·
  
  competition from larger producers of platinum group metals and from
  potential new producers;·
  
  the development of new technology or new alloys that could reduce the
  demand for palladium or platinum;·
  
  loss of key personnel;·
  
  the ability of the Company to comply with the terms of its credit
  facilities;·
  
  the ability of KFOC to control the Company;·
  
  risk related to hedging strategies;  2


·
  
  lack of infrastructure necessary to develop the Companys projects;·
  
  risks involved in current or future litigation or regulatory
  proceedings;·
  
  the ability of the Company to maintain adequate internal control over
  financial reporting and disclosure controls and procedures;·
  
  the ability of shareholders in the United States to enforce civil
  liabilities against a Canadian corporation; and·
  
  the Company may issue special shares which have rights potentially
  superior to the Companys common shares (Common Shares).  These factors should be considered carefully, and readers should not
place undue reliance on the Companys forward-looking statements. The Company
believes that the expectations reflected in the forward-looking statements,
including future-oriented financial information contained in this AIF are
reasonable, but no assurance can be given that these expectations will prove to
be correct. In addition, although the Company has attempted to identify
important factors that could cause actual actions, events or results to differ
materially from those described in forward-looking statements, including
future-oriented financial information, there may be other factors that cause
actions, events or results not to be as anticipated, estimated or intended. The
Company undertakes no obligation to disclose publicly any future revisions to
forward-looking statements, including future-oriented financial information, to
reflect events or circumstances after the date of this AIF or to reflect the
occurrence of unanticipated events, except as expressly required by law.
Additionally, the forward-looking statements, including future-oriented
financial information, contained herein are presented solely for the purpose of
conveying managements reasonable belief of the direction of the Company and
may not be appropriate for other purposes.  IMPERIAL-METRIC CONVERSION TABLE  Imperial
  
  Metric1 troy ounce
  
  31.103 grams1 ton, short
  
  0.907 tonnes1 troy ounce
  per ton
  
  34.286 grams
  per tonne1 foot
  
  0.305 metres1 mile
  
  1.609
  kilometres1 acre
  
  0.405
  hectares
  REPORTING CURRENCY, FINANCIAL AND RESERVE INFORMATION  The information in this AIF is presented as at December 31, 2008
unless otherwise indicated.  All dollar amounts referred to herein are in Canadian dollars unless
stated otherwise. Unless otherwise indicated, all financial information
included herein has been prepared in accordance with Canadian generally
accepted accounting principles, which may differ from United States generally
accepted accounting principles.  Unless otherwise indicated, all reserve and resource estimates included
in this annual information form have been prepared in accordance with Canadian
National Instrument 43-101  Standards of Disclosure
for Mineral Projects (NI 43-101) and the Canadian Institute of
Mining, Metallurgy and Petroleum classification system. NI 43-101 is a rule developed
by the Canadian Securities Administrators that  3


establishes standards for all public disclosure an issuer makes of
scientific and technical information concerning mineral projects.  Canadian standards, including NI 43-101,
differ significantly from the requirements of the United States Securities and
Exchange Commission (the SEC), and reserve and resource information included
herein may not be comparable to similar information disclosed by U.S.
companies. In particular, and without limiting the generality of the foregoing,
this document uses the terms measured resources, indicated resources and inferred
resources.  U.S. investors are advised
that while such terms are recognized and required by Canadian securities laws,
the SEC does not recognize them. Under U.S. standards, mineralization may not
be classified as a reserve unless the determination has been made that the
mineralization could be economically and legally produced or extracted at the
time the reserve determination is made. U.S. investors are cautioned not to
assume that any part of a measured resource or indicated resource will ever
be converted into a reserve.  U.S.
investors should also understand that inferred resources have a great amount
of uncertainty as to their existence and as to their economic and legal
feasibility. It cannot be assumed that all or any part of inferred resources
exist, are economically or legally mineable or will ever be upgraded to a
higher category. Under Canadian rules, estimated inferred resources may not
form the basis of feasibility or pre-feasibility studies except in rare cases.
Disclosure of contained ounces in a mineral resource is permitted disclosure
under Canadian regulations. However, the SEC normally only permits issuers to
report mineralization that does not constitute reserves by SEC standards as
in place tonnage and grade, without reference to unit measures. The
requirements of NI 43-101 for identification of reserves are also not the
same as those of the SEC, and reserves reported by North American Palladium in
compliance with NI 43-101 may not qualify as reserves under SEC standards.
Accordingly, information concerning mineral deposits set forth in this annual
information form may not be comparable with information made public by
companies that report in accordance with U.S. standards.  CORPORATE STRUCTURE  North American Palladium Ltd. is the successor to Madeleine Mines Ltd.,
a company incorporated under the Mining Companies Act (Quebec) by letters
patent in 1968.  From 1969 to 1981,
Madeleine Mines Ltd. operated a copper mine known as the Madeleine Mine, located
near Ste. Anne-des-Monts, Quebec.  In January 1992,
Madeleine Mines Ltd. was amalgamated with a federally incorporated company and
the amalgamated company was wound up into the parent company, 2750538 Canada
Inc.  This entity changed its name to
Madeleine Mines Ltd. and, in June 1993, the name was changed to North
American Palladium Ltd.  The Company
continues to exist under the Canada Business Corporations Act.  In 1991, Lac des Iles Mines Ltd. was incorporated under the Canada
Business Corporations Act as a subsidiary of Madeleine Mines Ltd. to hold the
Lac des Iles mining claims and assets. 
In 1994, Lac des Iles Mines Ltd. acquired the remaining 50% interest in
the Lac des Iles property from the Sheridan Platinum Group Ltd. to become the
sole owner of the property.  The Companys head and registered office is at 2116-130 Adelaide Street
West, Toronto, Ontario M5H 3P5, Canada, telephone: (416) 360-7590, fax:
(416) 360-7709.  The Companys mining
operations are located approximately 85 kilometres northwest of Thunder Bay at
Lac des Iles, in northern Ontario.  4


DESCRIPTION OF THE BUSINESS
AND GENERAL DEVELOPMENTS  Madeleine Mines Ltd., the predecessor of North American Palladium Ltd.,
acquired a 50% interest in the Lac des Iles property from the Sheridan Platinum
Group Ltd. in 1986 under an option agreement that required that the Company
bring an open pit mine into production by December 31, 1990 at a minimum
production rate of 3,000 tons per day. 
In 1994, Lac des Iles Mines Ltd. acquired the remaining 50% interest in
the Lac des Iles property from the Sheridan Platinum Group Ltd. to become the
sole owner of the property.  In 2000, the
Company commenced a $207 million expansion program, which included construction
of a new concentrator with a nominal capacity of approximately 15,000 tonnes
per day, larger primary and ancillary mining equipment, pre-production
stripping, an expanded tailings management facility and new site
infrastructure.  Development of an
underground mine commenced in the second quarter of 2004, with commercial
production being achieved on April 1, 2006.  Three-year
History  In March 2006, the Company executed an option earn-in and joint
venture with Vale Inco Limited (formerly CVRD Inco Limited) (Vale Inco) which
entitled it to earn a 50% interest in the former producing Shebandowan mine and
the surrounding Haines and Conacher properties, totalling approximately 7,974
hectares (the Shebandowan Joint Venture). 
On December 10, 2007, the Company announced that it had satisfied
the condition of the earn-in and had exercised its option to form an operating
joint venture with Vale Inco on this property, including the Shebandowan West
Property, located west of Thunder Bay, Ontario and within 100 kilometres of the
Companys Lac des Iles mine.  In order to
earn a 50% interest in the property, the Company incurred $3 million in
exploration expenditures and made cash payments totalling $200,000.  Vale Inco retains the remaining 50% interest
in the joint venture.  Also in March 2006, the Company signed a definitive agreement with
Gold Fields Limited, entitling the Company to earn up to a 60% undivided
interest in a land package known as the Arctic Platinum Project (APP).  APP is an advanced stage PGM-nickel-copper
exploration project located approximately 60 kilometres south of the city of
Rovaniemi, Finland.  In order to satisfy
the requirements of its earn-in, the Company had to satisfy a number of conditions
on or before August 31, 2008, including: (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; and (v) issue 9,227,033 Common Shares to earn a 60%  5


interest or, if Gold Fields exercised its claw-back right, issue
7,381,636 Common Shares to earn a 50% interest. 
In the summer of 2008, the Company received a draft of the feasibility
study which showed that lower commodity prices coupled with the increased price
of steel and diesel fuel, the strength of the euro relative to the U.S. dollar
and other variables had adversely impacted the economics of the project. As a
result of these findings, the Company determined that it would not deliver a
positive feasibility study for the Arctic Platinum Project prior to the August 31,
2008 deadline. The Companys option over the APP has since lapsed and all
interests have reverted back to Gold Fields Limited.  On June 23, 2006, the Company completed a private placement of
270,000 flow-through common shares at $12.50 per share for gross proceeds of
$3.38 million.  The gross proceeds for
the offering were used for exploration activities at the Lac des Iles mine and
to expedite work on the Shebandowan West Project.  In the first half of 2006, the Company issued two
series of convertible notes (the Convertible Notes Due 2008) for a total
aggregate principal amount of US$48.5 million. 
In conjunction with the Convertible Notes Due 2008, the Company issued
warrants to purchase 50% of the number of Common Shares underlying the Notes
over the ensuing four years (the Notes Warrants).  US$31 million of the Convertible Notes Due
2008 and underlying Notes Warrants were issued to Kaiser-Francis Oil Company (KFOC),
the Companys major shareholder.  US$35
million principal amount of Series I Convertible Notes Due 2008 (the Series I
Notes) and the Notes Warrants (the Series I Warrants) were issued on March 28,
2006.  On June 13, 2006, the Company
announced that it exercised its right to require KFOC to purchase a US$13.5
million convertible note (the Series II Note) and related Common Share
purchase warrants (the Series II Warrants).  The Company has since retired the Convertible
Notes Due 2008, having made its final repayment on December 31, 2008.  The Notes Warrants remain outstanding and, if
unexercised, will expire on March 29, 2010.  On February 5, 2007, the Company announced that it had entered
into a palladium and platinum purchase agreement with Auramet Trading, LLC (Auramet)
a New York precious metals trader and merchant bank, providing for the sale of
an average of 10,000 ounces of palladium and 500 ounces of platinum per month
over a two-year term.  At its election,
the Company may receive advance payments not exceeding, at any time, an
aggregate maximum amount of US$25 million. 
The Company granted Auramet a security interest in the concentrates
produced at the Lac des Iles mine together with the proceeds arising from the
sale of the concentrate, and by way of additional security, assigned its
smelting and refining agreement with Xstrata Nickel (Xstrata).  The palladium and platinum purchase agreement
expired on December 31, 2008.  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
$6.05 million.  The proceeds from the
financing were spent to expedite work on the Shebandowan West Project.  In April, 2007, the Company announced the results of a mineral resource
estimate prepared by Scott Wilson Roscoe Postle Associates Inc. (Scott Wilson
RPA) on the Offset High Grade Zone at the Lac des Iles mine (the Offset Zone).  The Offset Zone is the fault displaced
continuation of the Roby Zone, the main PGM deposit at the Lac des Iles mine
which has been mined for 15 years.  On October 11, 2007, the Company announced that it had acquired a
100% interest in the prospective portion of the Shawmere Anorthosite Complex,
located approximately 110 kilometres southwest of Timmins, Ontario.  The property was acquired by staking 40
contiguous claims containing 631 claim units in the Shawmere Anorthosite
Complex.  Access to most of the claim
group is provided by Highway 101 and existing forest access
roads.  The Company completed an
exploration program in the summer of 2008. 
While small geochemical anomalies were identified, the results were not
sufficiently prospective to warrant further exploration activity.  6


On December 13, 2007, the Company announced that it had closed a
public offering of 18,666,667 units at a price of US$4.00 per unit for total
gross proceeds of approximately US$75 million. 
Each unit consisted of one common share and one half of a common share
purchase warrant of the Company.  Each
whole warrant entitles 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.  On January 9, 2008, the Company issued
an additional 2,800,000 units under a 30-day overallotment option.  KFOC exercised its right to subscribe for 25%
of this over-allotment offering.  After
taking the over-allotment exercise into account, the total gross proceeds to
the Company from the unit offering were approximately US$86 million.  On April 23, 2008 the Company announced that it had been added to
the S&P/TSX Global Mining Index, an investable index that provides
investors with a broadly representative benchmark for global mining portfolios.  On May 7, 2008, North American Palladium released the results of a
Preliminary Economic Assessment prepared by Micon International Limited (Micon)
on the Offset Zone at the Lac des Iles mine, suggesting that the Companys
underground mining operations could be extended to 2018 by mining the deposit
at a rate of 6,000 tonnes per day, yielding up to 250,000 oz palladium, 16,000
oz platinum, 17,000 oz gold, two million lbs nickel and 4 million lbs copper
annually once full production was achieved. 
The Offset Zone is the fault displaced continuation of the Roby Zone,
which has been mined underground at the Lac des Iles mine since 2006. This
economic assessment is preliminary in nature and includes indicated and
inferred mineral resources. Approximately 80% of the resources included in the
2007 preliminary economic assessment are in the inferred category. Inferred
mineral resources are considered too speculative geologically to have economic
considerations applied to them that would enable the resource to be categorized
as mineral reserves. The studys level of accuracy is deemed to be plus or
minus 25%.  A detailed prefeasibility
study has since begun to confirm these results, which were preliminary in
nature and included measured, indicated and inferred mineral resources  A dispute with the Companys insurer relating to the failure of the
Companys primary crusher in 2002 at the Lac des Iles mine was settled in June 2008.  Under the settlement, the Company received a
cash payment of $14.5 million, which was in addition to a $7.1 million
insurance recovery received in 2004.  On October 1, 2008, William J. Biggar joined the Company as
President and Chief Executive Officer, replacing James Excell, with the dual
mandate of growing the Companys core assets and leveraging the Companys
strong balance sheet to pursue potential acquisitions and joint venture
opportunities.  On October 21, 2008, the decision was made to temporarily place the
Lac des Iles mine on care and maintenance effective October 29, 2008 due
to declining metal prices.  In
particular, declining sales and production in the automotive industry, the
major consumer of palladium and platinum, suggested that PGM producers would be
facing significant challenges in the near term. 
The closure resulted in the layoff of over 350 employees.  Management believes that it has access to
sufficient working capital to meet the Companys current needs due to existing
cash balances and the final settlement of concentrate awaiting settlement.  An updated mineral resource estimate was prepared by Scott Wilson RPA
in January 2009, which upgraded the indicated resource by 280%, from 3.2
million tonnes at 4.85 g/t Pd to 12.3 million tonnes at 5.02 g/t Pd (8.28 g/t
PdEq).  The Offset Zone has significantly
more mineral resources than the current underground mine at the Roby Zone at
similar grades, and remains open along strike to the north, south and at depth.  A technical report from the entire Lac des
Iles mine, including the Offset Zone, was filed with securities regulators on March 13,
2009.  7


An underground drilling program and a
detailed prefeasibility study are underway with the objectives of increasing
the tonnage and grade of the upper portion of the Offset Zone, upgrading
indicated resources to probable reserves, assessing the optimal mining and
milling configuration, and assessing the economics of developing the upper
portion of the Offset Zone. The prefeasibility report is expected to be
completed by the end of June 2009.  Business Overview  The following contains forward-looking
statements and future-oriented financial information about the Companys
business. Reference should be made to Forward-Looking Statements on page 1
and for a description of material factors that could cause the Companys actual
results to differ materially from the forward-looking statements in the
following, please see Risk Factors beginning on page 45. Additionally, the following description of
the Companys business includes many geological terms that may not be familiar
to the reader. For a description of the meaning of some of these terms, please
see the Glossary of Terms beginning on page 61.  On October 29, 2008, the Company
temporarily placed the Lac des Iles mine on care and maintenance due to
declining metal prices.  Prior to this,
North American Palladium was Canadas only primary producer of platinum group
metals (PGMs), producing an estimated 4% of annual global palladium
production. While the majority of the Companys revenue was derived from the
sale of palladium, the Company also generated 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 Zone) (the LDI Property) and the
Shebandowan Joint Venture.  For the 2008 fiscal year, the Companys
revenues totalled $56.3 million for palladium, $20.1 million for platinum,
$20.1 million for nickel, $14.4 million for gold, $12.2 million for copper and
$2.4 million for other metals, representing 45%, 16%, 16%, 11%, 10% and 2%
respectively of its total consolidated revenues.  However, as the mine was placed on temporary
care and maintenance at the end of October, 2008, these figures represent
approximately 10 months of operations. 
For the 2007 fiscal year, the Companys revenues totalled $91.8 million
for palladium, $31.0 million for platinum, $42.6 million for nickel, $13.0
million for gold, $15.0 million for copper and $2.5 million for other metals,
representing 47%, 15%, 22%, 7%, 8% and 1% respectively of its total
consolidated revenues.  Despite the temporary closure of the Lac des
Iles mine, management believes that it has access to sufficient working capital
to meet the Companys current needs through existing cash balances and the
final settlement of concentrate awaiting settlement. As at December 31,
2008, the Company had over $86 million in net working capital, including $43
million in cash and cash equivalents and $43 million in concentrate awaiting
settlement.  Prior to placing the Lac des Iles mine on
care and maintenance, North American Palladium had 415 employees. As of the February 1,
2009, the Company had 62 employees.  Of
this amount, 34 employees worked at the Lac des Iles mine, 5 at the Companys
finance and administration office in Thunder Bay, 13 out of an exploration
office in Thunder Bay and 9 at the Companys corporate head office in
Toronto.  The Company is dependent on a
skilled labour force with experience and a knowledge base in the mining
sector.  Whether as employees of the
Company or independent contractors, this labour force is generally available to
the Company from residents in the Thunder Bay area, although exploration and
corporate office personnel have been recruited both locally and across Canada.  8


Principal Market of Platinum Group Metals  Palladium is categorized as a precious metal,
along with gold, silver and platinum.  It
is one of the six platinum group metals, along with platinum, rhodium,
ruthenium, iridium and osmium. Palladium is used in the manufacture of
catalytic converters in the automotive industry, the manufacture of jewellery
and electronics, and in dental and chemical applications. As a precious metal,
there is also investment demand for palladium in dore bar format by exchange
traded funds and institutional investors  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 supplied by Russia (36%), the Republic of South Africa
(31%) and North America (10%). The CPM Group estimates that global supply of
palladium decreased by approximately 1% in 2008 to 8,452,000 ounces. Of this
total, mine production accounts for approximately 6,762,000 ounces (an
estimated decrease of 4% from the prior year) and secondary recovery of
palladium accounts for approximately 1,690,000 ounces.  Demand  The CPM Group estimates that global fabrication
demand for palladium (excluding investor demand) decreased by approximately 1%
in 2008 to 7,741,000 ounces, primarily as a result of reduced demand in the
U.S. and European automotive industries. 2008 marked the first year since 2001
in which overall palladium demand has declined.  The CPM Group estimates that 53% of the
global demand for palladium in 2008 stemmed from the automotive industry for
use in auto catalysts, 15% from electronics, 10% from dental applications, 9%
from Chinese demand, and 13% from other uses such as jewellery, chemical
catalysts and petroleum refining catalysts.  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 worldwide, resulting in steady growth in the
use of catalytic converters. Catalytic converters are now included in over 96
percent of new cars worldwide. With the palladium price currently substantially
below that of platinum, and with new technologies available, automakers have
increasingly been switching their catalyst formulations from those based on
platinum to palladium.  Palladium is now
also being used in diesel engines and can comprise up to approximately 30% of
the PGM content of a diesel catalytic converter.  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. Palladium is also
used in the manufacture of jewellery and may be used either on its own or as an
alloy in white gold. Additionally, various chemical applications use palladium,
including the 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 as a precious metal along with the other precious
metals (i.e., platinum, gold and silver). Strong investor sentiment for these  9


precious metals has provided support for a
favourable palladium pricing environment. Increased participation by a greater
variety of market participants and the resulting improvement in liquidity, and
the introduction of new investment vehicles are all influencing investment
demand for palladium. Palladium exchange traded funds (ETFs) were introduced
in 2007 by the same firms that have introduced platinum ETFs.  The Company sells palladium and platinum into
the spot market, where it is a price-taker. 
Up until the temporary closure of the Lac des Iles mine, other
by-product metals were sold to Xstrata under the terms of a smelting
agreement.  See Lac des Iles Mine 
Overview  Smelting and Refining.  Lac des Iles Property  Lac des Iles mine  The Company owns and
operates the Lac des Iles mine located 85 kilometres 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 has been idle since 2001). The primary
deposits on the LDI Property are the Roby Zone and the Offset Zone, both
disseminated magmatic nickel-copper-PGM deposits. 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. In 2007, the Company produced 286,334 ounces of
palladium from the Lac des Iles mine and in 2008, the Company produced 212,046
ounces of palladium up to October 29, 2008, when the mine was placed on
temporary care and maintenance.  At the time the mine was
placed on temporary care and maintenance, the open pit had a remaining mine
life of less than one year at the current rate of production. During more
favourable PGM market conditions, management assessed the economic viability of
a southern extension of the open pit, which might have prolonged the mine life
of the open pit by an additional two to three years.  However, as a result of a more detailed
assessment of development scenarios, management now believes that the capital
and operating costs associated with a pushback of the open pit, particularly in
current market conditions, make it unlikely that the open pit will be extended.  Furthermore, given the short
remaining mine life of the current open pit, the Company is considering shutting
down the pit permanently and mining the high grade core at the bottom of the
pit from the current underground mine. 
The Company is also contemplating commencing production from the upper
portion of the Offset Zone as the current underground mine ceases operations.  Offset High Grade Zone  The Offset Zone is located
on the Lac des Iles property and was discovered by the Companys exploration
team in 2001. The Offset Zone is considered to be the fault displaced
continuation of the Roby Zone mineralization and is located below and
approximately 250 metres to the southwest of the Roby Zone. A mineral resource
estimate prepared by Scott Wilson RPA in January 2009 estimated that the
Offset Zone has significantly more mineral resources than the current underground
mine at the Roby Zone at similar grades, while remaining open along strike to
the north and south and at depth.  On May 7,
2008, the Company announced the results of a preliminary economic assessment
prepared by Micon International Limited, which concluded that the Offset Zone
could extend the Companys underground mining operation to 2018 based on a
palladium price in excess of US$350 per ounce. Micon examined the economic
viability of several mining scenarios for the Offset Zone, including a
continuation of the existing ramp system from the current underground mine,
several shaft options and a conveying  10


option. The
study concluded that in order to achieve a production rate of 250,000 ounces of
palladium per annum, the underground mine could be operated at 4,000 - 7,000
tonnes per day using a series of conveyors and access ramps at an initial
estimated capital cost of $37 million.  The Micon study proposes
continuation of the longhole stoping mining method, which was the Companys
mining method prior to the temporary mine closure, at the existing underground
operations. Using a conveying system to bring ore to surface was found to be
advantageous since it provides a great deal of flexibility in decision making
and spreads total capital expenditures over the life of the mine.  When operating at 6,000
tonnes per day, the study estimates that the Offset Zone operation could yield
approximately 250,000 ounces of palladium, 16,000 ounces of platinum, 17,000 ounces
of gold, 2 million pounds of nickel and 4 million pounds of copper annually.
This economic assessment is preliminary in nature and includes indicated and
inferred mineral resources. Approximately 80% of the resources included in the
2007 preliminary economic assessment are in the inferred category. Inferred
mineral resources are considered too speculative geologically to have economic
considerations applied to them that would enable the resource to be categorized
as mineral reserves. The studys level of accuracy is deemed to be plus or
minus 25%.  An updated mineral resource
estimate was prepared by Scott Wilson RPA in January 2009.  The report showed that as a result of the
2007 underground drill program, approximately 73% of the resources are presently
classified in the indicated category. The Offset Zone is open for extensional
exploration drilling along strike to the north and south end down dip.  An underground drilling
program and a detailed prefeasibility study are underway with the objectives of
increasing the tonnage and grade of the upper portion of the Offset Zone,
upgrading indicated resources to probable reserves, assessing the optimal
mining and milling configuration, and assessing the economics of developing the
upper portion of the Offset Zone. The prefeasibility report is expected to be
completed by the end of June 2009.  Drill programs are planned
for 2009 and 2010 to increase confidence in existing mineral resources and to
delineate more resources. Potential exists to add new resources along strike to
the north and south and down-dip. Thus far the Offset Zone has been traced to a
depth of 1,300 metres below surface, and along a strike length of approximately
600 metres.  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 Joint Venture). 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 zones and the land package totals
approximately 7,974 hectares. These properties are located 90 kilometres west
of Thunder Bay, Ontario, and approximately 100 kilometres 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.  The
Shebandowan West Project encompasses three shallow mineralized zones within the
Shebandowan Joint Venture 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  11


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.  A Technical Report in compliance
with NI 43-101 disclosing the results of a mineral resource estimate by an
independent Qualified Person was filed on October 26, 2007.  Management was 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.  As currently
envisaged, the Shebandowan West Project will not trigger Vale Incos back-in
right.  In addition to the
Shebandowan West Project, preliminary discussions have been held with Vale Inco
about drilling certain deep targets with a view to identifying larger nickel
targets than those identified at the Shebandowan West Project.  No timeframe has been established for such a
drilling campaign, which would be funded equally by the Company and Vale Inco.  In light of the sharp
decline in metal prices in the fall of 2008, the Company ceased all activities
with the Shebandowan Joint Venture, including at the Shebandowan West Project.  A decision on whether and when to resume
activities has not been made and this will largely depend on the long term
outlook for nickel prices.  Former Arctic Platinum Project  The Arctic Platinum Project
(the APP) is an advanced stage nickel-copper-PGM exploration project located
approximately 60 kilometres south of the city of Rovaniemi, Finland. The
Company was party to an agreement with Gold Fields entitling it to earn up to a
60% interest in the APP.  In order to
satisfy the requirements of its earn-in, the Company had to satisfy a number of
conditions on or before August 31, 2008, including: (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; and (v) issue 9,227,033 Common Shares to earn a 60%
interest or, if Gold Fields exercised its claw-back right, issue 7,381,636
Common Shares to earn a 50% interest.  Management had 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 kilometres 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. Nickel-copper-PGM bearing concentrate would be transported 125 kilometres
by truck to a port facility located at Kemi, Finland and shipped to smelting
and refining facilities for final extraction of the contained metals.  However, the
Company received a draft of the feasibility study in the summer of 2008, which
showed that lower commodity prices coupled with the increased price of steel
and diesel fuel, the strength of the euro relative to the U.S. dollar and other
variables had adversely impacted the economics of the project. As a result of
these findings, the Company determined that it would not deliver a positive
feasibility study for the Arctic Platinum Project prior to the August 31,
2008 deadline. The Company advised Gold Fields of this outcome and the parties
discussed strategic alternatives for the project.  The parties failed to reach an  12


agreement and
the Companys option over the APP has since lapsed.  All interests in APP have now reverted back
to Gold Fields Limited.  Corporate Development and Grassroots Exploration  In addition to its operating
mine and two advanced exploration projects, grassroots exploration is an
important ongoing part of the Companys growth strategy.  Traditionally, North
American Palladium has examined PGM and nickel opportunities, particularly the
exploration potential around the Companys Lac des Iles mine, and on the
Shebandowan Joint Venture property. Management continues to believe that the
Company is well positioned to partner with other PGM 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.  However, the Company is also now considering
corporate transactions with gold companies, with a view to creating a precious
metals company producing gold, platinum and palladium.  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 challenging market conditions, which
are likely to continue throughout much of 2009, will give rise to consolidation
opportunities that will result in joint venture and acquisition opportunities
for the Company.  Mineral Resource Estimates  The table below sets forth
estimated mineral resources as at December 31, 2008 for the Lac des Iles
mine (including the Offset Zone) and as at August 9, 2007 for the
Shebandowan West Project, in each case as calculated pursuant to National
Instrument 43-101  Standards of Disclosure for Mineral Projects.  At the Lac des Iles mine,
the Company has reclassified all remaining open pit, underground, and
stockpiles from mineral reserves to mineral resources because the mine is
currently on care and maintenance.  Some
mineral resources may be converted to mineral reserves upon completion of the
prefeasibility study that is now underway.  The information under the
heading North American Palladium Projected Share of Project Resources assumes
a net inventory to North American Palladium of 50% for the Shebandowan West
Project. The Companys interest in the Shebandowan West Project could be
reduced to 40% upon the exercise by Vale Inco of a claw-back right.  North American Palladium Mineral
Resources:  Property
  
  Resources
  
  Tonnes
  
  Pd
  
  Pt
  
  Au
  
  Cu
  
  Ni
  
  Pd
  
  Pt(000)
  
  (g/t)
  
  (g/t)
  
  (g/t)
  
  (%)
  
  (%)
  
  (000 oz)
  
  (000 oz)Lac des Iles
  
  MeasuredRoby Zone
  Open Pit
  
  3,722
  
  1.99
  
  0.23
  
  0.17
  
  0.08
  
  0.07
  
  238
  
  28Roby Zone
  Stockpiles
  
  763
  
  2.09
  
  0.19
  
  0.18
  
  0.06
  
  0.08
  
  51
  
  5Indicated
  ResourcesRoby Zone
  Open Pit
  
  2,565
  
  2.20
  
  0.24
  
  0.18
  
  0.08
  
  0.07
  
  181
  
  20Roby Zone
  RGO Stockpile
  
  13,365
  
  0.97
  
  0.12
  
  0.08
  
  0.03
  
  0.06
  
  417
  
  52Roby Zone Underground
  
  3,292
  
  7.61
  
  0.44
  
  0.33
  
  0.06
  
  0.08
  
  805
  
  47Offset
  Underground
  
  12,331
  
  5.02
  
  0.38
  
  0.37
  
  0.11
  
  0.13
  
  1,990
  
  151Measured and Indicated
  
  36,038
  
  3.18
  
  0.26
  
  0.22
  
  0.07
  
  0.09
  
  3,682
  
  303InferredOffset
  Underground
  
  4,637
  
  4.9
  
  0.4
  
  0.3
  
  0.12
  
  0.13
  
  730
  
  60Shebandowan
  
  Measured
  
  368
  
  1.19
  
  0.37
  
  0.22
  
  0.66
  
  0.89
  
  14
  
  4Indicated
  
  924
  
  1.05
  
  0.33
  
  0.23
  
  0.60
  
  0.92
  
  31
  
  10Measured and Indicated
  
  1,292
  
  1.09
  
  0.34
  
  0.23
  
  0.62
  
  0.91
  
  45
  
  14Inferred
  
  171
  
  0.97
  
  0.27
  
  0.18
  
  0.61
  
  1.11
  
  5
  
  2  13


Notes:  (1)
  
  CIM
  definitions were followed for the estimation of Mineral Resources.(2)
  
  Mineral Resources for the
  Lac des Iles mine were estimated by Scott Wilson Roscoe Postle
  Associates, Inc.(3)
  
  Mineral
  Resources for the Roby open pit were estimated at a cut-off grade of 1.8 g/t
  PdEq, within an optimized pit shell run below the current pit survey
  (October 2008).(4)
  
  Mineral
  Resources in Lac des Iles mine stockpiles were estimated at a cut-off grade
  of 1.9 g/t PdEq.(5)
  
  Mineral
  Resources the Roby and Offset Zones underground were estimated at a cut-off
  grade of 5.8 g/t PdEq.(6)
  
  Lac des Iles minecut-off grades were determined under the assumption that a production
  rate of 14,000 tpd would be resumed in the event of re-starting operations.(7)
  
  For Lac des Iles mine,metal price assumptions of US$350/oz palladium, US$1,400/oz platinum,
  US$850/oz gold,US$6.50/lb nickel, and US$2.00/lb copper were used in the
  estimation of cut-off grade. A US$/C$exchange rate of 1.11 was used.(8)
  
  The mineral resource
  estimates for the Shebandowan West Project were prepared by F.H. Brown, CPG,
  Pr. Sci. Nat. (a qualified person under NI 43 101) using a cut-off grade of
  US$60.00 NSR and 18-month trailing average metal prices of US$300/oz Pd,
  US$750/oz Pt, US$400/oz Au, US$7/lb Ni and US$1.50/lb Cu.(9)
  
  Assumes a net inventory to
  North American Palladium of 50% for the Shebandowan West Project. The
  Companys interest is currently 50%, which could be reduced to 40% upon the
  exercise by Vale Inco of a claw-back right.(10)
  
  Pd and Pt ounces are stated
  as contained ounces. Disclosure of contained ounces is permitted under
  Canadian regulations; however, the SEC generally permits resources to be
  reported only as in place tonnage and grade.  MINERAL PROPERTIES  The Companys material
properties consist of one mine, which is currently on temporary care and
maintenance due to depressed metal prices, and two advanced staged exploration
projects. The following describes key aspects of the Companys material
properties. Please refer to the various reports prepared in accordance with NI
43-101 discussed below for a further description of these properties, including
their location, accessibility, climate, local resources, infrastructure,
physiography, geological setting, mineralization, past drilling programs and
history.  Lac des Iles Mine  Overview  At the request of the
Company, Scott Wilson RPA prepared mineral resource estimates for the Lac des
Iles mine, as described in two reports, the first dated January 15, 2009
and entitled Report on the Resource Estimate for the Offset Zoneat Lac des Iles Mine(the Offset Zone Report),
and the second dated March 13, 2009 and entitled Technical Report on the
Lac des Iles Mine, Thunder Bay, Ontario, Canada (the LDI Report).  The authors of the reports are qualified
persons under NI 43-101 and are independent of the Company.  The following description of
Lac des Iles has largely been summarized from the Offset Zone Report and the
LDI Report, which are available for review in Canada on the internet via the
System for Electronic Document Analysis and Retrieval (SEDAR) at
www.sedar.com and in the U.S. from the SECs  14


Electronic Document
Gathering and Retrieval System, which is commonly known by the acronym EDGAR,
and which may be accessed at www.sec.gov.  The Company owns the Lac des
Iles mine, which is located approximately 85 kilometres northwest of the city
of Thunder Bay, Ontario, Canada. The mine consists of an open pit mine, an
underground mine, the Offset Zone, a processing plant with a nominal capacity
of approximately 15,000 tonnes per day, and the original mill with a nominal
capacity of approximately 2,400 tonnes per day. The primary deposits on the
property are the Roby Zone and the Offset Zone.  On October 21, 2008, the
decision was made to temporarily place the Lac des Iles mine on care and
maintenance effective October 29, 2008, due to declining metal
prices.  In particular, declining sales
and production in the automotive industry, the major consumer of palladium and
platinum, suggested that PGM producers would be facing significant challenges
in the near term.  The closure resulted
in the layoff of over 350 employees.  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 metre and 23 cubic metre
shovels, 190 tonne trucks, 187 millimetre blast hole drills and a fleet of
conventional ancillary equipment. Mine waste is stockpiled outside of design pit
limits.  Development of the
underground mine began 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
metres below the surface where it is truncated by an offset fault. Commercial
production from the underground mine began on April 1, 2006.  For the 2008 fiscal year, the underground
mine had a run-of-mine average head grade of 5.71 grams per tonne of palladium
compared to 5.79 grams per tonne in 2007.  The chosen mining method for
the underground mine is sublevel retreat longitudinal longhole stoping with
unconsolidated rock fill. The mining block interval is 95 metres floor to floor
with two sublevels in between and twenty metre sill pillars between
blocks.  Stopes average 60 metres in
length with 7-10 metre wide vertical rib pillars between stopes. Total intake
ventilation for the mine is designed to be 205 cubic metres per minute. There
is one intake ventilation raise/secondary egress situated outside the ultimate
open pit limits and air exhausts up the main ramp.  At the time the mine was
placed on temporary care and maintenance, the open pit had a remaining mine
life of less than one year at the current rate of production. During more
favourable PGM market conditions, management assessed the economic viability of
a southern extension of the open pit, which might have prolonged the mine life
of the open pit by an additional two to three years.  However, as a result of a more detailed
assessment of development scenarios, management now believes that the capital
and operating costs associated with a pushback of the open pit, particularly in
current market conditions, make it unlikely that the open pit will be extended.  Furthermore, given the short
remaining mine life of the current open pit, the Company is considering
shutting down the pit permanently and mining the high grade core at the bottom
of the pit from the current underground mine. The Company is also contemplating
commencing production from the upper portion of the Offset Zone as the current
underground mine ceases operations.  15


Milling Operations  In 2001, a new mill facility was commissioned with a
nominal design capacity of 15,000 tonnes per day. The processing operation
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
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 2008, up until the temporary shutdown of the
mine, the concentrator processed 3,722,732 tonnes of ore or 11,419 tonnes per
calendar day at an average palladium head grade of 2.33 grams per tonne and an
average palladium recovery of 75.3%.  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%.  Production costs per tonne of ore milled were $30.85
in 2008 and $24.98 in 2007. Cash costs, which include direct and indirect
operating costs, smelting, refining, transportation and sales costs and
royalties, net of credits for by-products, were approximately US$283 per ounce
of palladium, for 2008 as compared to approximately US$164 per ounce of
palladium in 2007.  The following table sets forth the tonnes milled and
the metal production of the concentrate for each of the five years ended December 31,
2008:  Year Ended December 31,2004
  
  2005
  
  2006(1)
  
  2007
  
  2008(2)PALLADIUMOre milled (tonnes)
  
  5,298,544
  
  4,780,599
  
  4,570,926
  
  5,006,383
  
  3,722,732Head grade (g/t)
  
  2.41
  
  1.66
  
  2.18
  
  2.39
  
  2.33Recovery (%)
  
  75.2
  
  69.6
  
  74.0
  
  74.8
  
  75.3Mill Availability
  
  88.4
  
  86.5
  
  86.5
  
  91.1
  
  88.4Production (oz)
  
  308,931
  
  177,167
  
  237,338
  
  286,334
  
  212,046BY-PRODUCT METALSPlatinum (oz)
  
  25,128
  
  18,833
  
  22,308
  
  24,442
  
  16,311Nickel (lbs)
  
  4,320,970
  
  2,353,227
  
  2,721,042
  
  3,066,973
  
  2,503,902Copper (lbs)
  
  7,836,183
  
  5,514,670
  
  5,155,588
  
  5,536,044
  
  4,623,278Gold (oz)
  
  25,679
  
  14,308
  
  17,237
  
  20,092
  
  15,921  
 Note:  (1)     The
underground mine at Lac des Iles went into commercial production on April 1,
2006.  (2)     The
Lac des Iles mine was placed on care and maintenance on October 29, 2008.  16


If the Company permanently shuts down the open pit,
the mill will be reconfigured to process ore at a lower capacity.  A redesigned mill with a capacity of 6,000 to
7,000 tonnes per day would eliminate the current need for a SAG mill and would
significantly reduce operating costs for the mill.  The Preliminary Economic Assessment released
on May 7, 2008, suggests that an underground mining operation could be
mined at a rate of 6,000 tonnes per day, yielding up to 250,000 oz palladium,
16,000 oz platinum, 17,000 oz gold, two million lbs nickel and 4 million lbs
copper annually once full production was achieved.  A detailed prefeasibility study is currently
under way to confirm these results.  Facilities and Infrastructure  In addition to the 15,000 tonnes per day mill, the
Companys Lac des Iles mining operation includes a 2,400 tonnes per day mill,
which has been idle since 2001. Nordmin Engineering Ltd. has estimated that
this original mill could be refurbished and rendered operational relatively
quickly and economically. This could enable the Company to process material
from the Shebandowan West Project or elsewhere in a separate flotation circuit,
thereby ensuring that the quality of the concentrate produced from the Lac des
Iles mine ore remains unaffected by co-mingling with secondary feeds.  The Companys Lac des Iles mining operation also
includes an assay laboratory, a warehouse, an electrical shop, a three-bay
truck shop to service the larger haul trucks, an operations camp, a water
treatment plant, a propane storage facility, a fuel storage area, other minor
outbuildings, low grade stockpile areas, rock storage areas, tailings storage
areas and an electrical substation. Power is delivered to the site by a 65
kilometre power line, which ties directly into the Northwestern Ontario power
grid.  The present tailings management facility (the TMF)
at the Lac des Iles mine has been operating since 1990. The TMF is an
industrial waste impoundment structure, where erosion is minimized, runoff is
managed, water is returned to the mill facility as needed and excess water is
stored until it can be treated and released. The design of the operation is
expected to facilitate closure and reclamation of the facility at the end of
mine life. An expansion of the TMF was nearing completion when the mine was
placed on care and maintenance and, once completed, the expanded TMF is
expected to have sufficient capacity to hold all of the tailings generated
until the end of the current mine plan.  Smelting and Refining  The Company delivered substantially all of its
concentrate to Xstrata Nickel (formerly Falconbridge Limited) for treatment
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 for two additional one-year terms by the mutual agreement of the
parties. The concentrate is delivered by truck to Xstratas Sudbury, Ontario
smelter operations where the nickel and copper are extracted. The PGM and gold
bearing material is then further processed at Xstratas refining operations in
Kristiansand, Norway. Under the agreement, the Company has a precious metal
take-back option of refined palladium and platinum, which the Company has
historically exercised. The balance of the recovered metals is settled in cash.  Sales of metals in concentrate are recognized in
revenue (net of royalties, treatment, refining and other charges) in Canadian
dollars when concentrate is delivered to the Xstrata smelter in Sudbury for
treatment. Final pricing is determined by quoted market prices at the time that
the refined metal is sold, which can be up to six months later. Accordingly,
revenue in a quarter is based on current U.S. dollar denominated commodity
prices for sales occurring in the quarter and ongoing pricing adjustments from
prior sales that were recognized in the Companys revenue but remained 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, not including other
variables, a weakening in the Canadian dollar relative to the U.S. dollar will
result in additional revenues  17


and a strengthening in the Canadian dollar relative
to the U.S. dollar will result in reduced revenues. Since April 1, 2007,
the amount of the final pricing adjustment recognized on any commodity price
changes is reduced by any price participation deductions as provided for in the
Companys smelting and refining agreements. The Company does not currently
hedge against currency and commodity price fluctuations while concentrate is
awaiting settlement. See Risk Factors  Fluctuations in foreign currency
exchange rates in relation to the U.S. dollar may adversely affect the Companys
results of operations.  Metal Sales  In 2008, the Company sold palladium both into the
spot market and to Auramet, under a palladium and platinum advance purchase
facility that the Company entered into in January 2007. Palladium revenue
from such sales totalled $56.3 million in 2008 and represented 45% of the
Companys consolidated revenues for that year. The purchase facility provided
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 could receive advance payments not exceeding, at any
time, an aggregate maximum of US$25 million. The purchase price could 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 reflected the forward value corresponding to the
scheduled delivery date. Each advance payment was subject to a discount and,
upon the delivery of the precious metals to Auramet, the Company was paid the
difference between the advance payment and the purchase price. The Company
granted Auramet a security interest in the concentrates produced at the Lac des
Iles mine together with the proceeds arising from the sale of the concentrate,
and by way of additional security, assigned its smelting and refining agreement
with Xstrata Nickel.  The palladium and platinum purchase agreement
expired on December 31, 2008 and the Company does not currently intend to
renew the facility.  In 2008, all palladium production was sold into the
spot market. Revenues from these sales totalled $91.8 million and represented
47% of the Companys consolidated revenues for that year.  Royalties  Production from the Lac des Iles mine and any future
production from the Offset Zone is subject to a royalty agreement with the
Sheridan Platinum Group Inc. and John Patrick Sheridan (together, the Sheridan
Group). Under the agreement, the Company is required to pay the Sheridan Group
a net smelter return royalty equal to 5% of net cash proceeds received from
concentrates and other products produced on the Lac des Iles property. Net cash
proceeds are calculated as proceeds from the sale of concentrates after
deducting; (i) the costs of sampling, assaying, transporting and insuring
the concentrate; (ii) smelter processing and refining charges and
penalties (excluding the Companys own processing costs); and (iii) all
applicable taxes and royalties that must be paid in respect of the mining
operations. In respect of palladium and platinum, the Sheridan Group has the
option to be paid in kind and, to date, have elected to exercise this payment
option.  Labour Matters  Employees at the Lac des Iles mine are either
salaried or paid hourly. The hourly employees at the Lac des Iles mine, other
than supervisors, are members of United Steelworkers of America, Local 9422. In
2006, the Company and the union signed a new three-year collective agreement
that expires on February  18


23, 2009.  As
the mine is currently on temporary care and maintenance, the Company and the
union have not held discussions to renew the collective agreement.  Employees live at the mine site during their work
week and most have homes in Thunder Bay, Ontario, a city of approximately
110,000 people with an international airport, rail service and port facilities
on Lake Superior.  The underground development work at Lac des Iles was
conducted using contractors, given the general shortage of, and significant competition
for, skilled underground miners. Underground production mining at the Lac des
Iles mine was conducted by Company employees, and was supplemented from
time-to-time by contractors for specialized projects or during periods where
manpower was insufficient to meet production levels.  Offset High Grade Zone  Overview  The Offset Zone is located on the Lac des Iles
property and was discovered by the Companys exploration team in 2001. The
Offset Zone is the fault displaced continuation of the Roby Zone mineralization
and is located below and approximately 250 metres to the south west of the Roby
Zone.  An updated mineral resource estimate was prepared by
Scott Wilson RPA in January 2009, which upgraded the indicated resource by
280%, from 3.2 million tonnes at 4.85 g/t Pd to 12.3 million tonnes at 5.02 g/t
Pd (8.28 g/t PdEq).  The Offset Zone has
significantly more mineral resources than the current underground mine at the
Roby Zone at similar grades, and remains open along strike to the north, south
and at depth.  An underground drilling
program and a detailed prefeasibility study are underway with the objectives of
increasing the tonnage and grade of the upper portion of the Offset Zone,
upgrading indicated resources to probable reserves, assessing the optimal
mining and milling configuration, and assessing the economics of developing the
upper portion of the Offset Zone.  Project Description and Location  The LDI Property comprises approximately 86.4 square
kilometres of mineral claims and leases. The LDI Property is located at
Latitude 49°10 North, Longitude 89°37 West, 85 kilometres northwest of the
community of Thunder Bay in northwestern Ontario. The mine, mill and tailings
impoundment area lie in the Boreal Forest ecoregion, characterized by typical
northern Ontario forest with numerous lakes and beaver swamps.  The mine site straddles the Spruce River and the Dog
River/Matawin Forests. The land surrounding the mine is Crown Land with limited
access, and was historically used primarily for recreation, forest resource
extraction, and trapping. The Lac des Iles mine is the only developed mine in
the area. The mine area is part of a registered trap line. Lac des Iles mine (LDI)
co-operates with the Sustainable Forest Licence holders, utilizing the area to
ensure that marketable timber on the mine site is harvested.  LDI holds six mining leases comprising 3,416.3
hectares. Contiguous with these leases are 54 mineral claims consisting of 331
claim units covering 5,119.1 hectares, for a total property area of 8,535.3
hectares. LDI owns the surface rights to some but not all the claims and
leases.  The Company is required to pay a royalty to the
Sheridan Group equal to 5% of the net cash proceeds from mining operations on
the LDI Property until the expiration of the Lac des Iles leases. All mining  19


operations at the Lac des Iles mine are, and all
future operations at the Offset Zone will be, on the mining leases covered by
the royalty agreement with the Sheridan Group.  Accessibility, Climate, Local Resources, Infrastructure and
Physiography  Accessibility  Access to the site is via a paved provincial highway
from Thunder Bay and then via a 15 kilometre all-weather private road to the
mine site. The site itself is served by well-maintained gravel surface roads.  Climate  The Lac des Iles area experiences hot summers and
cold, snowy winters. Maximum and minimum temperatures range from an extreme low
of -30°C in the winter months to an extreme high of 38°C in the summer months.
Winter lows of -30°C are not uncommon in January and February. Mean annual
precipitation at the LDI Property is approximately 714 millimetres. The area is
snow-covered for approximately five and a half months per year, with monthly
snowfalls ranging from 270 millimetres to 450 millimetres in winter. Prevailing
winds at the Lac des Iles mine are from the Northwest. The relative humidity
ranges from 50% to 77%. Weather conditions are rarely severe enough to halt
mining operations and generally the only issue is related to safe traction on
the access roads and ramps within the open pit mine. Mill operations are
enclosed and are therefore not exposed to the weather other than feed stocks.
LDI does not budget for weather related shutdowns in the mines.  Local Resources  Thunder Bay, with a population of approximately
110,000, is the major service center for northwestern Ontario and provides most
of the services required by the mining operation. This includes an airport with
regular daily service to and from major Canadian cities, rail connections, and
ocean access via the Great Lakes and St. Lawrence Seaway.  Most mine and mill consumables including fuel,
cement and propane are readily available in Thunder Bay. Due to the projects
proximity to Thunder Bay, the Lac des Iles mine has had recent success in
hiring experienced staff and personnel with considerable mining and processing
expertise. Most staff operate on a 4 day on / 3 day off or 7 day on / 7 day off
shift. Contract miners operate on a 28 day in / 14 day out schedule.  Infrastructure  The main facilities of the mine are the old camp
area, the new camp area, the main office and tire shop, the old mill area, the
new mill area, which includes the open pit shops, warehouse and operational
offices, the old concentrator building, the open pit and stockpile area, the
underground portal and related ventilation accesses, and the TMF.  A 324-person capacity camp and recreational complex
was built in conjunction with the construction of the new mill. This facility
was expanded in 2006 to accommodate the underground workforce and now has a
460-person capacity camp.  All purchasing is handled by the on-site staff, with
regular freight movement between the Lac des Iles mine site and Thunder Bay.
On-site warehouse space accommodates spares for open pit and underground mining
as well as milling operations. The trucking contractor maintains a transhipping
warehouse in  20


Thunder Bay for Lac des Iles material. Road access
to the site is adequate for moving in most materials, including oversize mining
equipment.  Waste dumps and ore stockpiles of various grades
have been established on the surface near the concentrator facilities. One
significant aspect is that the waste rock from pit walls is relatively benign
and classified as non-acid generating. Similar waste rock from the underground
workings is placed as fill in the mined underground stopes.  Tailings from the mill are deposited and water
reclaimed for use in the concentrator. The TMF was expanded in 2008 to meet
future milling capacity.  Water and sewer services are supplied independently
for each facility and are considered by the Company to be adequate for current
needs. Expansion of potable water and sewer services were completed for the
underground workforce additions. Electrical power is supplied by Hydro One via
a 118 kV line to a main substation on site. Site distribution is maintained by
Lac des Iles and consists of 4,160 V overhead lines around the site. There is a
services agreement with the provincial utility currently in place.  Physiography  The Lac des Iles mine is located in northwestern
Ontario which lies within the Superior Province of the Canadian Precambrian
Shield, a boreal forest region typified by black spruce, birch, poplar and jack
pine, and low areas of numerous lakes and treed swamps. Drainage is poorly
integrated and generally south to Lake Superior. Local land use is primarily
forestry related. The topography of the site is favourable for the placement of
facilities, being generally of low relief. Elevations on the property range
from 418 metres above sea level to 550 metres above sea level, exclusive of the
open pit.  History  Significant palladium mineralization was first
discovered in the Roby Zone in 1963 by prospectors. Various exploration
programs were undertaken over the next 25 years by a number of companies,
including Gunnex, Anaconda, Texas Gulf Sulphur, and Boston Bay Mines.  In 1990, Madeleine Mines Ltd. developed the property.
After intermittent production and continuing capital expenditures, commercial
open pit production of the Roby Zone was achieved in December 1993. The
Company was formed as an outcome of corporate reorganization. In 2000, LDI
commenced an expansion program at the Lac des Iles mine and a new mill was
commissioned in the second quarter of 2001, which achieved its nominal rated
15,000 tonnes per day throughput in August 2002.  A major Phase 4 push back of the south and east pit
wall was undertaken in 2004-2005, with waste removal of upper benches completed
in 2005. In 2006, the open pit mine was redesigned to address south wall slope
stability issues. This pit redesign was finalized in September 2006.  From 1999 to 2001, the Companys exploration arm
carried out an extensive drilling campaign on behalf of LDI that identified
mineralization at depth, below the ultimate pit bottom. The drilling identified
two zones with potential for underground mining: the Main High Grade Zone and
the Offset Zone.  On July 31, 2003, Roscoe Postle Associates Inc.
(RPA) completed a positive pre-feasibility study for underground mining of
the Main High Grade Zone (down dip extension of the open pit Main Zone) at the
Lac des Iles mine on behalf of LDI. Subsequently, RPA completed a feasibility
study for the underground mine dated February 27, 2004. The study proposed
to develop a 2,000 tonnes per day underground mine  21


to run concurrently with the existing open pit mine.
A NI 43-101 Technical Report by RPA dated April 2, 2004, summarized LDIs
underground project at the mine as of March 31, 2004.  Underground development on the High Grade Zone below
the Roby pit started in 2004, with the ramp developed and the zone accessed in
late 2005. Development muck was delivered to the concentrator in December 2005
and underground commercial production began in April 2006.  The Offset Zone was discovered in 2001 by the
Company.  The Offset Zone is the fault
offset, down dip extension of the High Grade Zone that is currently being mined
underground below the Roby open pit at the Lac des Iles mine. From 2001 to 2006
some 63 holes totalling 62,022 metres from both underground and surface diamond
drilling programs have explored the Offset Zones. The 2006 drilling was planned
to confirm grade continuity at hole spacing in the zone of 50 metres by 50
metres and upgrade a portion of the inferred resources to indicated
resources.  From May to October 2007,
the Company completed approximately 18,000 metres of infill drilling in the
upper 300 metres of the Offset Zone, with the objective of upgrading that
portion of the mineral resources to the measured and indicated categories.  On February 23, 2007 Scott Wilson RPA completed
an independent estimate of mineral resources of the Offset Zones, which was
updated in January 2009 to reflect the results of additional drilling. The
Offset Zone has been traced from 311,600N to 312,125N on strike (525 metres)
and vertically from -60 RL to -550 RL (490 metres) at depths of 575 metres to
1,065 metres. The current 2009 drilling program is being completed from a
5095RL exploration drift targeting the upper portion of the Offset Zone.  Geological Setting  Regional Geology  The Lac des Iles area is underlain by mafic to ultramafic
rocks of the Archean Lac des Iles Intrusive Complex. These rocks have intruded
granites and greenstones of the Wabigoon Subprovince of the Superior Province.
The Lac des Iles Intrusive Complex lies immediately north of the Wabigoon
Quetico subprovince boundary, which extends some 300 kilometres from Rainy Lake
to Lake Nipigon. The Lac des Iles Intrusive Complex is the largest of a series
of mafic and ultramafic intrusions that occur along the boundary and which
collectively define a 30 kilometre diameter circular pattern in the Lac des
Iles mine area.  Local and Property Geology  The mine lies in the southern portion of the Lac des
Iles Intrusive Complex, in a roughly elliptical intrusive package measuring 3
kilometres long by 1.5 kilometres wide. These rocks, locally termed the Mine
Block Intrusive (MBI), comprise a very wide range of textures and mafic and
ultramafic compositions. The MBI is host to a number of PGM deposits, and the
most important of these is the Roby Zone. The Roby Zone consists of three
subzones: the North Roby Zone, High Grade Zone, and Breccia Zone. The main area
of economic interest for underground mining is the High Grade Zone of the Roby
Zone, extending beneath the open pit mine and the Offset Zone, a fault
displaced depth extension of the High Grade Zone.  High Grade Zone Ore is hosted mainly within a
portion of a 15 metre to 25 metre thick unit of occasionally sheared
PXN/melanogabbro. A host to high-grade PGM mineralization, it is located in the
east central portion of the Roby Zone, bounded by the barren EGAB hangingwall
and HGABX hosted Breccia Ore to the west. The High Grade Zone is primarily
confined to a 400 metre long segment of the PXN, although it does extend
northward into the GN. The High Grade Zone, striking north-northwest to  22


north-northeast, dips near-vertically near surface
and flattens to nearly 45o at depth. The zone appears to be terminated down dip
by a relatively shallow dipping fault, the Offset Fault.  Below this structure, the Offset Zone, a higher
grade zone similar to the High Grade Zone, has been intersected in drill holes,
where it is displaced down and approximately 300 metres to the west. Within the
wireframed Offset Zone, the palladium mineralization is hosted in approximately
37% heterolithic gabbro breccia, 32% pyroxenite, 16% gabbro and gabbro
breccias. Approximately 3% of the zone is occupied by late dikes (dilution).
Higher grade portions of the Roby Footwall Zone, in the footwall of the Offset
Zone, are hosted 60% by heterolithic gabbro breccia and 31% by vari-textured
gabbro, gabbro and gabbro norites with dilution by approximately 1% late dikes.  Exploration  Since the early 1960s the LDI Property has been
mapped by several companies. The first detailed mapping of the Roby Zone was
conducted by LDI between 1992 and 1994. During this period, the eastern part of
the zone was stripped of overburden, then mapped and sampled. This program
continued in 1995 over the South Roby area. In 1998, the area between the south
pit and the main pit was stripped, mapped and channel sampled. In 1999, this
program was expanded to the area east of the Roby pit and resulted in the
discovery of the mineralized Twilight Zone and several other zones of mineralization.
The Baker, Moore and Creek zones have been explored sporadically over the last
ten years.  The Offset Zone was discovered in 2000 and 39 holes
(35,363 metres) were drilled in, and immediately above, the zone during 2000
and 2001 to explore the zone. In 2001, geological interpretations of available
data were initiated and a large east west striking oblique-slip fault with an
offset throw of 300 metres (to the southwest) was interpreted to displace the
down plunge extent of the high grade ore. Two holes for 2,783 metres were
drilled in the zone in 2003 and 2004. Fifteen additional holes (18,230 metres)
were drilled in 2005.  In 2006, LDI spent approximately $1.5 million for
diamond drilling to better define and upgrade a portion of the Offset Zone to
an inferred resource. As of 2005, drill hole intercepts within the Offset Zones
were generally spaced at 120 metres to 140 metres. The 2006-2007 infill
drilling program was designed to tighten the spacing to approximately 50 metres
by 50 metres in and around some of the wider intercepts. Eight wedge offset
holes (5,663 metres) were drilled from two surface holes to fill in on certain
sections and close the hole spacing, allowing for classification of some of the
inferred resources as indicated resources.  Development of the 5095RL underground exploration
drift that began in 2006 was completed in April 2007 at a total cost of $2
million. The underground exploration drift off from 5095RL is currently being
drilled off to explore the Offset Zone. The two targets are primarily the
Shallow Offset High Grade Zone and the Roby Footwall Zone.  Mineralization  PGM, gold and base metal mineralization in the Lac
des Iles intrusion occur in both primary and secondary environments within
sulphide and silicate minerals. Mineralization appears to be predominantly
strata-bound along the contact between the East Gabbro and the mineralized
Heterolithic Gabbro Breccia. Within the Heterolithic Gabbro Breccia, there is a
high grade core typically constrained to an easily recognized ultramafic unit
known as the Pyroxenite (PXN).  23


Visible PGM mineralization is rare to nil, and
difficult to predict. Palladium and platinum mineralization within the High
Grade Zone consists primarily of fine-grained PGM sulphide, braggite and
telluride minerals, merenskyite and kotulskite.  Higher PGM grades (mean -7.89 g/t palladium, maximum
-55.95 g/t palladium) occur in those portions of the PXN that are altered to an
assemblage of amphibole (anthophyllite actinolite hornblende)-talc-chlorite.
The PGM tenor is not proportional to the sulphide content, and samples free of
visible sulphide often contain more than 10 g/t palladium. The high-grade
mineralisation is located primarily within the western, highly altered portion
of the pyroxenite unit. The higher grade High Grade Ore is not restricted to
the PXN as it commonly straddles the PXN/gabbro breccia contact to depths
exceeding 250 metres.  Platinum group and chalcophile elements occur in
variable amounts in almost every ore type within the Roby Zone. The majority of
PGMs either occur within sulphides or are associated with sulphides at sulphide
silicate boundaries, occurring as discrete mineral inclusions within secondary
silicates of altered rocks (CIM Exploration Mining and Geology, Volume 10,
2001).  Drilling  The LDI Property has been subjected to numerous
drill campaigns since the early 1960s. From May 1997 to May 2001,
Matawin Mineral Exploration Inc., under contract to LDI, managed the
exploration and drilling programs on the property. In May of 2001, LDI
established its own metals exploration division. Chibougamau Diamond Drilling
was the drill contractor until 1999. A variety of contractors have carried out
drilling on the property since then.  Core recovery is excellent throughout the deposit
and is reported to average close to 100 percent. Since 2006, the Companys
exploration division has noted core recovery on the drill logs.  Sampling, Analysis and Security  Since 2003, the Lac des Iles drill hole core has
been prepared and analyzed by Accurassay Laboratories (Accurassay), a
division of Assay Laboratory Services Inc., in Thunder Bay. Accurassay is an
independent, commercial mineral laboratory and is accredited by the Standards
Council of Canada under ISO/IEC 17025 guidelines.  The sample preparation and assay procedures used by
Accurassay are as follows. Core sample numbers are entered into the local
laboratory information management system. Samples are dried, if necessary, then
jaw crushed to -8 mesh (2.36 millimetre). A 250 gram to 400 gram cut is taken
by riffle splitting, with the balance stored as coarse reject. The cut is plate
pulverized to 90%-150 mesh (106=m), and then matted to ensure homogeneity.
Silica sand is used to clean out the pulverizing dishes between each sample to
prevent cross contamination.  For precious metals assay, a one assay ton pulp
split (±30 gram) is mixed with a lead based flux and fused in a muffle oven.
The resulting lead button is placed in a cupelling furnace where all of the
lead is absorbed by the cupel, and a silver bead, which contains any gold, platinum
and palladium, is left in the cupel. Once the cupel has been removed from the
furnace and cooled, the silver bead is placed in a labelled small test tube and
digested using a 1:3 ratio of nitric acid to hydrochloric acid. The samples are
bulked up with 1.0 millilitres of distilled de-ionized water and 1.0 millimetre
of 1% digested lanthanum solution for a total volume of 3.0 millilitres. The
solution is cooled and vortexed and then allowed to settle. Analysis for gold,
platinum, and palladium is then performed using atomic absorption spectroscopy
(AA). The AA unit is calibrated for each element using the appropriate ISO
9002 certified standards in an air-acetylene flame.  24


For base metal assay, pulps are digested using a
multi-acid digest (nitric acid, hydrofluoric acid, hydrochloric acid). The
samples are bulked up with 2.0 millilitres of hydrochloric acid and brought to
a final volume of 10.0 millilitres with distilled de-ionized water. The samples
are vortexed and allowed to settle and then analyzed for copper, nickel, and
cobalt using atomic absorption spectroscopy.  The results for the atomic absorption are checked by
the technician and forwarded to data entry by electronic transfer, and a certificate
is produced. The laboratory manager checks the data and validates it if it is
error-free. The results are then forwarded to LDI by email and in hardcopy by
mail. The Exploration Office in Thunder Bay maintains hardcopy laboratory
certificates and digital copies on file, the latter stored by drill hole
number. The digital analytical results are compiled, formatted, and imported
into the master drill hole database.  Core samples are secured in the logging/sampling
geology facility at the mine site. The mine itself has a gate house and
barriers to restrict public access. Core samples are trucked by exploration
staff to the Accurassay laboratory in Thunder Bay.  Mineral Resource Estimates  The mineral resource estimate and underlying
assumptions for the LDI Report are set out above. See General Development of
the Business and Description of the Business Mineral Resource Estimates.  Shebandowan West Project  At the request of the Company, Des Cullen, P.Geo.,
Consulting Geologist, F.H. Brown CPG, Pr. Sci. Nat., Consulting Geologist, and
Laila Potvin, P.Eng., Mill Superintendent at Lac des Iles Mines Ltd., prepared
a report dated August 9, 2007 entitled Technical Report on the
Shebandowan West Property, Thunder Bay Mining Division, Northwestern Ontario (the
Shebandowan Report). Each of Mr. Cullen and Mr. Brown is a qualified
person within the meaning of NI 43-101 and is independent of the Company. Mrs. Potvin
is also a qualified person within the meaning of NI 43-101 and was an
employee of the Company at the time the report was issued.  The following description of the Shebandowan West
Project has largely been summarized from the Shebandowan Report, which is
available for review on the internet via the SEDAR website located at
www.sedar.com under North American Palladiums profile.  Overview  On December 10, 2007, the Company earned a 50%
interest in the former producing Shebandowan mine and the surrounding Haines and
Conacher properties (the Shebandowan Joint Venture) 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 7,974 hectares.
These properties are located 90 kilometres west of Thunder Bay, Ontario, and
approximately 100 kilometres 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.  The Shebandowan West Project encompasses three
shallow mineralized zones within the Shebandowan Joint Venture 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  25


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.  A Technical Report in compliance
with NI 43-101 disclosing the results of a mineral resource estimate by an
independent qualified person was filed on October 26, 2007.  Management was 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. As
currently envisaged, the Shebandowan West Project will not trigger Vale Incos
back-in right. No timeframe has been established for the refurbishment of the
Shebandowan West Project.  In addition to the Shebandowan West Project,
preliminary discussions have been held with Vale Inco about drilling certain
deep targets with a view to identifying larger nickel targets than those
identified at the Shebandowan West Project. 
No timeframe had been established for such a drilling campaign, which
would be funded equally by the Company and Vale Inco.  In light of the sharp decline in metal prices in the
fall of 2008, the Company ceased all activities with the Shebandowan Joint
Venture, including the Shebandowan West Project.  A decision on when to resume activities will
largely depend on the long term outlook for nickel prices.  Project Description and Location  The Shebandowan West Project is located in Hagey and
Haines Townships in the Thunder Bay Mining District, approximately 90
kilometres west of Thunder Bay, Ontario. The UTM co-ordinates for the approximate
centre of the property are 700500 E, 5386800 N.  The Shebandowan Joint Venture consists of six
unpatented claims (eight units) covering an area of approximately 132 hectares,
and 205 patented and leased mining claims totalling approximately 7,842 hectares,
all of which are held 100% by Vale Inco. The Shebandowan West Project is part
of this larger land package that includes the leases hosting the current
Shebandowan mine workings.  A power-line approximately six kilometres to the
north of the property previously serviced the Shebandowan mine. Also on the
property are backfilled and flooded mine workings immediately east of the
project area. A tailings pond, pump shack and gate house remain on the property
as well.  No permits were required to undertake the drilling,
metallurgy and resource estimate by the Company on the Shebandowan West
Project. Permits will be required if a decision is made to develop a mine.  Accessibility, Climate, Local Resources, Infrastructure and
Physiography  The Shebandowan Joint Venture property is located
approximately 90 kilometres west of Thunder Bay, Ontario, and is centred 15
kilometres west southwest of the town of Shebandowan, which is situated on
Trans Canada Hwy #11.  26


Year round access to the property is available via
the Inco Mine Road that starts at Shebandowan and crosses the property.
Temperatures range from highs of 35°C in summer to lows of -30°C in winter,
with snow cover between November and May. The best season for exploration
is between June and October, although exploration activities of lake
covered or swampy areas such as geophysical surveys and diamond drilling might
best be conducted after winter freeze-up.  Thunder Bay is a city of approximately 110,000 people
with an international airport with daily scheduled jet service, rail service,
and port facilities at the west end of Lake Superior. Shebandowan is a town
with a very small year-round population and limited services including seasonal
accommodation, electrical and telephone utilities, railroad, highway and public
lake access to Lower Shebandowan Lake.  Based on the history of the property and the mine,
the project area has sufficient surface rights and sufficient availability of
power, water, mining personnel and mining infrastructure to carry out future
mining operations.  History  The following chronology is from MNDM Mineral
Deposit Files: INCO-Shebandowan. The reader is cautioned not to rely on
historic information as its accuracy cannot be guaranteed.  1913-14
  
  Nickel is discovered by W. W. Benner at Discovery
  Point. Test pits blasted by Cross Brothers.1923
  
  Samples are sent to the Ontario Department of
  Mines provincial assayer.1927-30
  
  Trenching, stripping and diamond drilling is conducted
  by Cross Brothers. Geological mapping and diamond drilling is performed.1936-52
  
  Claims are purchased by Inco; trenching,
  test-pitting, geophysical surveys and diamond drilling is conducted.1952-65
  
  Intermittent diamond drilling is undertaken by
  Inco.1966-67
  
  No. 1 development shaft is commenced in
  spring 1966 and completed in the following year. Underground diamond drilling
  is conducted. Geophysical surveys performed.1966-67
  
  Inco undertakes various exploration programs while
  development and production of the orebody continues, including: geological,
  geophysical and geochemical surveys; stripping; and diamond drilling in the
  search for both precious and base metals.1972-98
  
  Aubut, Lavigne, Scott and Kita state in Metallurgy,
  Stratigraphy and Structure of the Shebandowan Greenstone Belt (1990) that
  the Shebandowan mine has been in semi-continuous production since 1972 at an
  average production rate of about 2,000 tons per day. The orebody is up to
  150 feet wide, has a strike length of 6,200 feet and plunges to the east.1972-98
  
  Concentrate produced from the Shebandowan mine is
  alternatively shipped to Sudbury, Ontario, or Thompson, Manitoba, for
  smelting and refining.  27


1972-98
  
  Production from the Shebandowan mine totalled 8.7
  million tons at 2.07% nickel, 1.00% copper and approximately 3.0 g/t PGM and
  gold (B. Schnieders, personal communication).1993-2001
  
  The provincial and federal governments undertake
  many mapping projects in the area, the most recent of which include:
  geological mapping by Osmani (1993) OGS Map 2625 and 2626; airborne
  geophysical survey (1991) OGS Map 81560; Lake sediment and water geochemical
  survey (2001) OGS open file report 6057; and Till sampling survey (2001) OGS
  open file report 6046.1998-2006
  
  The Shebandowan mine ceased production in 1998 and
  by 2006 the mine site had largely been rehabilitated with continuing
  maintenance and monitoring of the tailings site.  Geological Setting  Regional Geology  The Shebandowan Joint Venture property is underlain
by the Shebandowan Greenstone Belt which is part of the Wawa Subprovince of the
Superior Structural Province of the Canadian Shield. In this area, the Wawa
Subprovince is fault-bounded to the north by the sedimentary plutonic suites of
the Quetico Subprovince and to the south by the Paleoproterozoic rocks of the
Animikie Group and the Keweenawan Supergroup.  Property Geology  The Shebandowan West Project lays immediately west
of the past producing Shebandowan mine. The project area is located along the
western strike extension of the former orebody and exhibits many similar
geological features and controls to those found at the mine-site.  The Shebandowan West Project area is underlain by
east-west-striking and steeply north-dipping Keewatin metavolcanics and
ultramafics with local interflow metasediments lying north of Timiskiming
metavolcanics and metasediments. A regional fault called the Crayfish Creek
Fault is a dextral fault generally found along the southern contact of the
southern ultramafic, separating the Keewatin and Timiskiming rocks. The
southern Timiskiming rocks consist of intensely foliated and sheared
agglomerates and felsic to intermediate metavolcanics now sericite schists.  A younger granite called the Shebandowan Lake Stock
intruded the Keewatin metavolcanics and lies on the north side of the project
area. The Keewatin metavolcanics consist predominantly of crudely banded mafic
volcanics that often exhibit intense foliation and shearing associated with
strong chlorite and epidote alteration. Within the Keewatin Metavolcanic suite
are ultramafic units thought to be magmatic flows or sills that host nickel and
copper-bearing sulphides and chromite mineralization. The ultramafic units
strike approximately 107 degrees and dip sub-vertically. There are two
ultramafic bodies termed the Northern and Southern Peridotites, which lie
within and along the southern contact of the banded Keewatin metavolcanics
along the Crayfish Creek Fault.  Exploration  Exploration Geophysics  In February of 2004, Geotech Ltd., on behalf of
the Company, flew a helicopter-borne, time domain, electromagnetic (EM),
geophysical survey over an area that included the Shebandowan West Project.  28


The airborne survey included collection of EM and
magnetic data. The survey was flown at 100 metre line spacings in a north-south
direction at 80 kilometres per hour. The data recording rates were 0.1 second
for both EMs and magnetics with an EM sensor flight height of 30 metres. The
mine stratigraphy was used as a base of reference to work from producing
magnetic and EM anomalies. The ultramafics within the Shebandowan West Project
are highlighted as moderate magnetic anomalies with weak-to-moderate local EM
conductors.  In February 2004, on behalf on the Company,
Crone Geophysics & Exploration Ltd. conducted a Surface Pulse EM
survey over the D-Zone, and the western portion of the Shebandowan West
Project. A grid was cut by Nord-Ouest Exploration totalling approximately 5,350
metres having 200 metre line spacing and 1,100 and 1,150 metre length lines
along with a baseline. Results of the survey produced a moderate EM anomaly in
an area of known mineralization and historic drilling.  From September 20 to 28, 2004, Geosig Inc., on
behalf of the Company, conducted a detailed ground magnetometric gradiometric
survey over the Road and D-Zones. The survey was carried out on a flagged grid
of 30.7 line kilometres. The grid consisted of 300 metre lines spaced at 12.5
metres apart. The readings were taken along the grid lines every 5 metres. Due
to the location of Shebandowan Lake, the survey could only be conducted on the
central to western side of the property. The intent of the survey was to better
define the near surface geology as well as identify important structures that
may influence the location or emplacement of the nickel copper mineralization.  A small gravity survey was conducted along Shaft 1
road across the stratigraphy of Road zone by A. Spector of Allan Spector &
Associates Ltd. The survey took place in July 2004 using a
thermostatically controlled Sodin gravimeter and a differential barometric
altimetry system at 100 metre stations along the road. A gravity anomaly was
generated over the ultramafics that host the Road Zone mineralization.  Exploration Trenching  On behalf of the Company, J & J Hackl Ltd.
was contracted to do trenching in the D-Zone area, which was carried out in October 2006.
Six trenches were dug with a Tanga F221 Excavator and a one-yard bucket in an
attempt to extend mineralization along strike of the historic D-Zone showing.
Two out of the six trenches directly west of the historic showing uncovered
mineralization, while the other four uncovered barren ultramafic rocks. Three
of the six trenches were filled in due to extensive overburden depths. Various
beep-mat traverses were carried out north-south across stratigraphy to try and
discover surface conductors.  Exploration Drilling  Throughout 2005 and 2006, three diamond drill
programs (D-Zone, Phase I and Phase II) were carried out. See Drilling below.
All diamond drill holes were collared west of and on Discovery Point of Lower
Shebandowan Lake targeting the D, Road and West Zones. A total of 87 diamond
drill holes were completed totalling 13,102.3 metres.  Mineralization  Nickel copper mineralization on the Shebandowan West
Project is believed to represent the western extension of the Shebandowan mine
orebody. At the Shebandowan mine, nickel copper bearing sulphide mineralization
strikes 107 degrees, dipping sub-vertically and was mined over a 2.0 kilometre
strike length and to a vertical depth of 902 metres. Mineralization at the
Shebandowan mine was mainly hosted within the Northern Peridotite, along the
contact with the hanging wall Keewatin metavolcanics. Nickel copper sulphide
mineralization occurred generally as irregular lenses of semi-massive breccia
style  29


sulphides and as stringer sulphides, with more
localized pods of massive sulphide material. In general, the massive sulphides
tended to have a higher nickel tenure while the copper rich sulphides were more
associated with PGM mineralization within the stringer style mineralization
and, where present, net-textured sulphides. The sulphide mineralization appears
to gradually shallow and thins out to the west while the eastern boundary is
reported to be steeply plunging with a higher sulphide content.  Nickel copper mineralization has been traced by
diamond drilling across most of the Shebandowan West Project, however the
mineralization appears discontinuous, forming three separate zones called West
Zone, Road Zone and D-Zone (from east to west respectively).  Mineralized Zones  The West Zone is the largest of the three nickel
copper zones on the Shebandowan West Project and lies immediately west of and
includes parts of the area around Shaft 1. It has a known strike length of 285
metres and varies between two and 20 metres in width averaging six metres and
has been traced from surface to a depth of 175 metres. This mineralization
strikes 107 degrees and dips sub-vertically. Nickel copper mineralization in
the West Zone is comprised of disseminated to massive sulphides located along
the northern or hanging wall contact of the Northern Peridotite. Common
sulphide minerals within the mineralized horizon are pentlandite, pyrite,
chalcopyrite, pyrrhotite, violerite, bornite and millerite.  There has apparently been a significant amount of
remobilization associated with post mineral deformation and faulting, as a
result of which the sulphide mineralization appears to pitch and swell both
along strike and in a down dip direction. This is the case for the West Zone as
well as for the Road and D Zones. This pinching and swelling was also a common
feature noted in the Shebandowan mine. Inco has stated that the sulphide
mineralization has been seen pinching from approximately 30 feet to two feet
over the length of one round underground.  The Road Zone is located between West Zone and the
D-Zone. Mineralization in the Road Zone differs somewhat from the West and
D-Zone as it appears to have bifurcated and is hosted within two separate but
subparallel ultramafic units (North and Main Units). The North and Main Units
are interpreted to represent the lateral equivalent of the Northern Peridotite.
Both nickel copper zones are composed of disseminated to massive pyrrhotite,
chalcopyrite, pentlandite and pyrite that vary in concentrations and widths located
at the northern or hanging wall contacts of the North and Main Units. The Road
Zone mineralization is typically highly variable in widths from 0.5 to 15
metres but averages four metres in width for the North Unit and five metres in
width for the Main Unit. Mineralization has been encountered in drilling down
to a depth of 181 metres where it appears to be closed off and can be traced
along strike for 483 metres.  The D-Zone is an historic surface showing discovered
in the late 1920s. Previous historic drilling suggests that the D-Zone
represents the western-most extent of near surface nickel-copper bearing
sulphide mineralization. Mineralization in this area is very shallow and
discontinuous. The presence of late felsic diking and faulting has caused significant
disruption and offsetting of the mineralization. Sulfides in this zone vary
from disseminated pyrite to massive pyrrhotite with associated pentlandite,
chalcopyrite and pyrite. Breccia style mineralization is most common.  Mineralization Types  Nickel-copper sulphide mineralization observed in
drill core on the Shebandowan West Project generally occurs as semi-massive or
breccia style sulphides and as stringer sulphides, with more localized pods of
massive sulphide material and rarely observed net textured sulphides. The most
common sulphide minerals are pentlandite, pyrite, chalcopyrite, pyrrhotite,
violerite, bornite and millerite.  30


Massive sulphides are generally less abundant than
semi-massive and stringer sulphides and comprise approximately 13% of the
overall mineralization. The massive sulphides consist of pyrrhotite with common
pentlandite eyes and minor chalcopyrite and pyrite. The pyrrhotite is very
fine-grained and exhibits flow textures as a result of remobilization. Round
two-to-three millimetre pentlandite eyes are common as very lustrous, distinct
grains within duller and finer pyrrhotite. Minor chalcopyrite can be present
and is usually found along the peridotite/ sulphide contacts.  The semi-massive or breccia style mineralization is
the second most common form of sulphide mineralization found on the Shebandowan
West Project, consisting of approximately 26% of the overall mineralization
observed. Breccia style mineralization is commonly a mixture of pyrrhotite,
chalcopyrite and pyrite at a ratio of approximately 4:3:1 respectively
containing numerous clasts of the host ultramafic rocks. The sulphides are
draped around sub-rounded ultramafic clasts that range in diameter from one
millimetre to over 10 centimetres. Very often, the clasts are coated or rimmed
by fine-grained chalcopyrite and minor pyrite.  Stringer type mineralization is the most common form
of mineralization encountered throughout the Shebandowan West Project
comprising approximately 34% of the sulphide material. The stringers commonly
contain chalcopyrite with lesser pyrrhotite and pyrite and are generally
one-to-three centimetres in width but vary from one-to-two millimetres to five
centimetres in size. Stringer mineralization is often found along the outer
contacts of the breccia style and massive sulphide mineralization as splays and
fine dikelets.  Drilling  The Company has attempted to review the practices
and details of the historic drilling carried out by Inco on the Shebandowan
property since the signing of the March 2006 joint venture agreement. No
information on drilling practices was made available, but header, survey and
lithological data was provided by Inco. Since 1936, Inco had diamond drilled a
total of 195 surface holes on the Shebandowan West Project totalling 41,800.65
feet (12,740.80 metres). Underground drilling was conducted from various levels
and consisted of 1,038 holes totalling 59,202.38 feet (18,044.90 metres).  In November 2005, four drill holes were drilled
around the historic D-Zone. The drilling was undertaken to confirm the validity
of previous drilling done by Inco and to test the EM anomaly generated in the
2004 ground pulse EM survey performed by Crone Geophysics. Two of the four
drill holes intersected semi-massive to massive sulphide. This mineralization
was intercepted in the vicinity of historic mineralization, and there was a
close correlation with the EM anomaly produced from 2004. A total of 584 metres
were drilled in the 2005 D-Zone phase of drilling.  The Phase I program took place from May 31 to August 3,
2006 to test previous drilling and larger gaps in historic drilling. This Phase
I drilling campaign consisted of 21 drill holes totalling 4,010 metres, which
targeted three zones of the Shebandowan West Project (West Zone, Road Zone and
D-Zone). Sixteen holes were drilled in the West Zone totalling 3,290 metres,
three holes were drilled in the Road Zone totalling 483 metres and two holes
were drilled in the D-Zone totalling 237 metres. The drilling confirmed the
presence of mineralization in all three zones within the Shebandowan West
Project.  Sixty-two holes were drilled during the Phase II
program that took place from September 27 to December 14, 2006 with
the use of two drills. The Phase II program totalled 8,508.3 metres of which 25
holes were drilled in the West Zone for 4,815.8 metres, ten holes were drilled
in the Road Zone for 1,674.0 metres, and 23 holes were drilled in the D-zone
for 1,951.5 metres and four rock characterization holes were drilled totalling
60 metres.  31


Throughout 2005 and 2006, a total of 13,102.3 metres
were drilled on the Shebandowan West Project. The results of the drilling
confirm the continuity of sulphide mineralization and correlation with the
EMCOR geological model. All drilling on the Shebandowan West Project was
carried out by Bradley Brothers Limited on behalf of the Company.  Drill hole Summary  Drilling Campaign
  
  Year Drilled
  
  Number of Holes
  
  Total Metreage
  
  Number of SamplesD-zone
  
  2005
  
  4
  
  584
  
  142Phase I
  
  2006
  
  21
  
  4,017
  
  1,103Phase II
  
  2006
  
  62
  
  8,501.3
  
  2,056  Sampling, Analysis and Security  Sampling  Drill core samples for assaying were selected based
on significant mineralization or alteration through the sulphide
mineralization. The logging geologist generally sampled in one-metre intervals,
with exceptions at lithological contacts and always sampled a minimum of
one-to-two metres of barren material adjacent to the mineralization to ensure
that the mineralization unit was completely defined.  No drilling or recovery factors were noticed that
could materially impact the accuracy and reliability of the results.  All samples collected by the Company and delivered
to Accurassay were analyzed for precious metals by fire assay with an AA
finish, while base metals were analyzed using aqua-regia.  Quality Assurance and Quality Control Procedures  As a means of quality assurance and control for each
diamond drilling program, blank and standard samples were randomly inserted
into the continuous sampling series. The insertion of blank and standard
materials was done to ensure the accuracy of the assay results against any
laboratory bias. For each drill hole, random positions were chosen for the
blanks within each set of 20 samples (e.g. one blank sample within samples 001
to 020, one blank sample within samples 021 to 040, etc). Similarly, random
standard sample positions were chosen within each set of 30 samples (e.g. one
standard sample within samples 001 to 030, one standard sample within samples
031 to 060, etc).  Sample Security  The Company took reasonable steps to ensure the
security of samples from the drill site through to the database, including the
following:  ·secure taping of
box lids when boxing core at the drill site;  ·careful transport
of core from the drill rig to the core shack to ensure jumbling does not occur;  ·measures taken to
ensure that the core, split samples, blanks and standards were locked in the
logging and sampling facilities;  ·piecing together
and orientation of each core run prior to core photography;  32


·securing of
sample bags and fibre bags with electrical tape for transport to Accurassay
Laboratories in Thunder Bay;  ·retention of both
coarse rejects and pulps in secure locked storage; and  ·retention of
half-core in core boxes located in sturdy storage racks on private property
where they are not clearly visible from public roadways.  The measures discussed above do not guarantee that
the samples are completely immune from tampering, but the secure storage of the
remaining half core, the coarse rejects, and the pulps means that any suspicion
of fraudulent behaviour can always be resolved by reference to the original
sample, which has been retained.  Mineral Resource Estimates  The mineral resource estimate and underlying
assumptions for the Shebandowan West Project are set out above, based on a
US$60.00 net smelter return mineralization shell. See General Development of
the Business and Description of the Business  Mineral Reserve and Mineral
Resource Estimates.  Corporate Development and Grassroots Exploration  In addition to the Lac des Iles property and the
Shebandowan Joint Venture, grassroots exploration is an important ongoing part
of the Companys growth strategy. Traditionally, North American Palladium has
examined PGM and nickel opportunities, particularly the exploration potential
around the Lac des Iles mine, and on the Shebandowan Joint Venture property.  From time-to-time, the Company enters into
confidentiality agreements with other 
mining companies or individual prospectors to assess the prospective
nature of their land holdings. Management continues to believe that the Company
is well positioned to partner with other PGM 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.  The Company is also now considering corporate
transactions with gold companies, with a view to creating a precious metals
company producing gold, platinum and palladium. Management believes that the
challenging market conditions, which are likely to continue throughout much of
2009, will give rise to joint venture and acquisition opportunities for the
Company.  FINANCING  Senior Credit Facilities  On June 28, 2004, the Company entered into a
US$20 million and a $10 million senior credit facility (the Senior Credit
Facilities) with a leading equipment finance company.  An aggregate of $4.4 million remained
outstanding under the Senior Credit Facilities as of December 31, 2008,
all of which is expected to be repaid in 2009. 
The US$20 million credit facility is repayable in equal quarterly
instalments of US$1 million which began on September 30, 2004 and which
will reach final maturity on June 30, 2009. The $10 million credit
facility is repayable in equal quarterly instalments of $0.5 million which
began on February 24, 2005 and will reach final maturity of November 24,
2009. The Senior Credit Facilities have an interest margin of 2.5% over the
30-day LIBOR rate and the finance company has a first priority security in all
of the Companys existing and future assets excluding its production leases and
claims.  33


KFOC Credit Facilities  In December 2001, KFOC provided a US$20 million
non-revolving credit facility to finance the Companys working capital
requirements. In the second quarter of 2004, the KFOC credit facility was
extended toJune 30, 2006 as part of a debt
restructuring plan. Interest was based upon the 30-day LIBOR rate plus 2.50%
and there was a stand-by fee of 0.125% per annum. In connection with the loan,
the Company granted KFOC a security interest in the assets of the Company,
including a pledge of the LDI shares. The security interest was subordinated to
the security interests of the senior credit facility.  This credit facility was repaid on June 23,
2006 pursuant to the terms of the Series II Note issued on that date.  See Convertible Note Financing.  On October 12, 2006,
the Company obtained from KFOC a US$5 million short-term working capital loan
maturing December 31, 2006.  The
interest rate under the loan was the 30-day LIBOR rate plus 2.5%.  The Company paid a commitment fee of
US$38,000 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 KFOC 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$25,000 for the extension.  As at December 31,
2006, the outstanding loan was US$5 million. 
The loan was repaid on March 7, 2007.  See Palladium and Platinum Purchase
Agreement.  The amount payable to KFOC
for interest, standby fees and guarantee fees on these facilities was $nil in
2008 compared to $90,000 in 2007 and $551,000 in 2006 respectively. As at January 20,
2009 As of January 20, 2009 KFOC reported that it held approximately 44%
of the issued and outstanding Common Shares.  Convertible Note Financing  On March 29, 2006, the
Company issued US$48.5 million principal amount of convertible notes (the Convertible
Notes Due 2008) together with warrants to purchase, for four years from the
date of their issuance, 50% of the number of Common Shares underlying the Notes
(the Notes Warrants), including the placement of US$31 million of the
Convertible Notes Due 2008 and related Notes Warrants with KFOC, the Companys
major shareholder.  On March 28,
2006, the Company settled the pricing for US$35 million principal amount of Series I
Notes Due 2008 (the Series I Convertible Notes) and the Notes Warrants
(the Series I Warrants).  On June 13,
2006, the Company announced that it had exercised its right to require KFOC to
purchase a US$13.5 million convertible note (the Series II Note) and
related common share purchase warrants (the Series II Warrants).  The offering is governed by the securities
purchase agreement dated March 24, 2006 (the Securities Purchase
Agreement) among the Company, KFOC and IP Synergy Finance Inc. (IP Synergy).  The Securities Purchase Agreement also
provided the Holders with an option to acquire a third tranche of US$10 million
principal amount of convertible notes (the Series III Convertible Notes)
on or before December 31, 2006.  The
Holders elected not to exercise their option to acquire the Series III
Convertible Notes.  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. Series I 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 KFOC up to US$13,500 principal amount a Series II
Note on or before June 30, 2006, which would be used to repay a loan under
an existing KFOC credit facility. On June 23, 2006, the Company exercised
this right and issued to KFOC a US$13,500 aggregate  34


principal amount Series II
Note, which was initially convertible into 1,108,374 Common Shares of the
Company at any time by the holder at US$12.18 per share. Series II
Warrants exercisable to purchase 554,187 Common Shares were issued with the Series II
Note, with each Notes 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 notes bore interest at a
rate of 6.5% per annum payable bi-monthly. The Series I Notes and Series II
Note were repayable in nine equal instalments commencing April 1, 2007 and
August 1, 2007, respectively. The interest and interest payments were
repayable at the purchasers option, in Common Shares of the Company, issued at
a 10% discount from the weighted average trading price of the Common Shares on
the NYSE Amex (AMEX prior to December 1, 2008) for the five consecutive
trading days immediately prior to applicable payment date.  The Convertible Notes Due
2008 and the related Series I and Series II Warrants contained 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 an effective price per share
less than a stated amount, the conversion/exercise price of the outstanding
Convertible Notes and Series I and Series II Warrants was to be
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 Company has since
retired the Convertible Notes Due 2008, having made its final repayment on December 1,
2008.  The Series I Warrants and Series II
Warrants remain outstanding and, if unexercised, will expire on March 24,
2010.  In respect of its obligations for
the year ended December 31, 2008, the Company issued 7,778,699 Common
Shares to the Holders in payment of interest and principal due under the
Convertible Notes Due 2008.  Public Offering  On December 13, 2007,
the Company announced that it had closed its public offering of 18,666,667
units at a price of US$4.00 per unit for total gross proceeds of approximately
US$75 million.  Each unit consisted of
one Common Share and one half of a Common Share purchase warrant of the
Company.  Each whole warrant entitles 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.  Under the terms of the
Securities Purchase Agreement between the Company, KFOC and IP Synergy relating
to the Companys Convertible Notes Due 2008 (see Financing  Convertible Note
Financing), KFOC 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 KFOC or IP Synergy subscribed for less than
its 12.5% share, the unused right was to be offered to the non-declining party,
KFOC 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, KFOC 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. After taking the over-allotment exercise
into account, the total gross proceeds to the Company from the unit offering
were approximately US$86 million.  KFOC
also elected to exercise its right to subscribe for 25% of this over-allotment
offering, which is included in the additional 2,800,000 units.  35


Palladium and Platinum Purchase Agreement  On February 5, 2007,
the Company announced that LDI had entered into a platinum and palladium
purchase agreement dated as of January 19, 2007 (the Auramet Agreement)
with Auramet, a precious metals merchant, providing for the purchase and sale
of an average of 10,000 ounces of palladium and 500 ounces of platinum per
month. The Company is a guarantor of LDIs obligations under the Auramet
Agreement.  LDI could not request any
purchase and sale after June 15, 2008 and all sales and payment had to be
settled by December 31, 2008. LDI was able to receive advance payments not
exceeding, at any time, an aggregate maximum of US$25 million.  The purchase price of the
metal purchased under the Auramet Agreement could be fixed or provisional,
determined in the case of fixed by: (i) Auramets current market bid price
at the time of the transaction, and/or (ii) market limit orders by LDI to
Auramet that have been concluded; and in the case of provisional pricing, the
afternoon fixing of the London Bullion Marketing Association immediately
preceding the purchase. In each case such pricing was to reflect the forward
value corresponding to the scheduled delivery date. Advance payments to LDI
could not exceed specified values of fixed and provisionally priced platinum
and palladium. Provisional prices had to be fixed prior to the scheduled delivery
date for such precious metals. Each advance payment was subject to a discount
equal to LIBOR plus 1.9% 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 paid LDI the difference between the advance
payment and the purchase price.  The Company granted Auramet
a security interest in the concentrates produced at the Lac des Iles mine
together with the proceeds arising from the sale of the concentrate, and by way
of additional security, assigned its smelting and refining agreement with
Xstrata Nickel.  The first advance payment
was made on March 7, 2007 and was used to repay a bridge loan from the
Companys major shareholder and subsequent advance payments were used to
finance working capital requirements.  Under this agreement with
Auramet no advances could be received after June 2008 and any amounts
advanced had to be repaid by December 31, 2008.  As at December 31, 2008, the Company had
no advances outstanding under this facility.  DIVIDENDS  The Company has not paid any
dividends to date on the Common Shares. The payment of dividends on the Common
Shares is restricted under the terms of the Companys Senior Credit Facility.
Further, the Company intends to retain its earnings, if any, to finance the
growth and development of its business. Accordingly, the Company does not
expect to pay any dividends on its Common Shares in the near future. The actual
timing, payment and amount of any dividends will be determined by the Companys
board of directors from time to time based upon, among other things, cash flow,
results of operations and financial condition, the need for funds to finance
ongoing operations and such other business considerations as the Companys
board of directors may consider relevant.  CAPITAL
STRUCTURE  The authorized share capital
of the Company consists of an unlimited number of Common Shares, an unlimited
number of special shares, issuable in series. There are no special shares outstanding.  As of February 23, 2009, there were
86,767,063 Common Shares of the Company outstanding and options outstanding
pursuant to the 1995 Corporate Stock Option Plan entitling holders thereof to
acquire  36


1,461,100 Common Shares at a
weighted average exercise price of $5.10. As of the same date, there were also
13,489,898 warrants outstanding each warrant entitling the holder thereof to
purchase one Common Share at a weighted average exercise price of US$6.01.  The Companys directors may,
by resolution, fix the number of shares in, the designation of, and determine
the rights, privileges, restrictions and conditions attaching to, each series
of special shares. The special shares of each series rank on a parity with the
special shares of any other series in respect of dividends or the return of
capital. The holders of special shares are entitled to receive, in priority to
the holders of Common Shares and the shares of any other class ranking junior to
the special shares, as and when declared by the directors, dividends in the
amounts specified or determinable in accordance with the provisions of the
series of which such special shares form a part. In the event of the
liquidation, dissolution or winding-up of the Company, whether voluntary or
involuntary, before any amount is paid to the holders of Common Shares or
shares of any other class ranking junior to the special shares, the holders of
special shares shall be entitled to receive, to the extent provided for with
respect to such series, an amount equal to the price at which such shares were
issued, such premium, if any, as has been provided for with respect to such
series, and all unpaid cumulative dividends or declared and unpaid
non-cumulative dividends. The special shares of any series may also be given
such other preferences over the Common Shares and any other class of shares
ranking junior to the special shares as may be determined in the case of such
series. The holders of special shares are not entitled to vote separately as a
class and the holders of any series of special shares are not entitled to vote
separately as a series except as required by the Canada Business Corporations Act.  Each Common Share entitles
the shareholder to one vote at all meetings of shareholders other than meetings
at which only the holders of another class or series of shares are entitled to
vote. Each Common Share entitles the holder thereof, subject to the prior
rights of the holders of the special shares, to receive any dividends declared
by the board of directors and the remaining property of the Company upon
dissolution.  Pursuant to the public
offering of December 13, 2007 and the exercise of and over-allotment
option of January 9, 2008, the Company has issued 10,733,333
warrants.  Each whole warrant entitles
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. 
The Warrants were issued in registered form under, and are governed by,
an indenture dated December 13, 2007 (the Warrant Indenture) and
available under the Companys profile on SEDAR at www.sedar.com between the
Company, on the one hand, and Computershare Trust Company of Canada, on the
other hand, as warrant trustee.  The holders of the warrants
will not possess any rights as shareholders of the Company until such holders
exercise the warrants. The warrants do not contain provisions for cashless
exercise and there is no minimum or maximum amount which may be exercised at
any one time. The warrants may be transferred or assigned.  The Warrant Indenture will provide for
adjustment in the number of Common Shares issuable upon the exercise of the
Warrants and/or the exercise price per Common Share upon the occurrence of
certain events as fully described in the Warrant Indenture. The Warrant holders
may be expected to exercise the Warrants at a time when the Company would, in
all likelihood, be able to obtain any needed capital by an offering of Common
Shares on terms more favourable than those provided for by the Warrants.  The Warrants are listed on the NYSE Amex and
the Toronto Stock Exchange (the TSX).  All of the foregoing
statements are subject to the more detailed provisions of the Warrant
Indenture.  37


PRICE RANGE AND TRADING VOLUME  The Common Shares are listed for trading on the NYSE
Amex exchange under the trading symbol PAL and the TSX under the trading
symbol PDL. The following table sets out the market price range and trading
volumes of the Common Shares on the NYSE Amex and the TSX for the periods
indicated.  NYSE Amex
  
  TSXHigh
  
  Low
  
  Volume
  
  High
  
  Low
  
  Volume(US$)
  
  (US$)
  
  
  
  (Cdn.$)
  
  (Cdn.$)2008January
  
  4.82
  
  3.28
  
  27,931,000
  
  4.58
  
  3.25
  
  4,880,000February
  
  9.43
  
  4.55
  
  75,510,000
  
  9.45
  
  3.25
  
  11,031,300March
  
  9.29
  
  4.90
  
  43,167,000
  
  8.49
  
  5.01
  
  6,697,400April
  
  6.61
  
  4.55
  
  23,259,000
  
  6.70
  
  4.67
  
  3,012,300May
  
  7.18
  
  4.78
  
  29,011,000
  
  6.85
  
  4.87
  
  2,926,800June
  
  5.93
  
  4.91
  
  18,052,000
  
  5.94
  
  5.02
  
  1,716,300July
  
  5.50
  
  4.10
  
  13,050,000
  
  5.70
  
  4.19
  
  1,802,600August
  
  4.41
  
  3.47
  
  11,345,000
  
  4.61
  
  3.70
  
  1,255,500September
  
  3.78
  
  1.98
  
  20,485,000
  
  4.10
  
  2.03
  
  3,653,100October
  
  2.24
  
  0.95
  
  21,550,000
  
  2.44
  
  1.21
  
  3,202,400November
  
  1.71
  
  0.91
  
  8,422,000
  
  1.99
  
  1.16
  
  2,189,200December
  
  2.04
  
  0.91
  
  20,422,433
  
  2.40
  
  1.14
  
  1,880,6002009January
  
  2.21
  
  1.35
  
  11,613,088
  
  2.59
  
  1.71
  
  1,392,434February
  
  1.55
  
  1.25
  
  8,104,690
  
  2.49
  
  1.55
  
  802,340  The Warrants are listed for trading on the NYSE Amex
under the trading symbol PAL.WS and the TSX under the trading symbol
PDL.WT.  The following table sets out
the market price range and trading volumes of the Warrants on the NYSE Amex and
the TSX for the periods indicated.  NYSE Amex
  
  TSXHigh
  
  Low
  
  Volume
  
  High
  
  Low
  
  Volume(US$)
  
  (US$)
  
  
  
  (Cdn.$)
  
  (Cdn.$)2008January
  
  1.51
  
  0.51
  
  1,330,000
  
  1.41
  
  0.62
  
  917,960February
  
  5.41
  
  1.13
  
  3,280,000
  
  5.29
  
  1.25
  
  1,983,010March
  
  5.05
  
  1.75
  
  1,360,000
  
  5.02
  
  1.76
  
  576,001April
  
  2.89
  
  1.54
  
  658,419
  
  2.85
  
  1.60
  
  197,124May
  
  3.10
  
  1.65
  
  432,900
  
  2.90
  
  1.72
  
  183,351June
  
  2.30
  
  1.63
  
  221,148
  
  2.43
  
  1.67
  
  81,692July
  
  1.93
  
  1.03
  
  189,366
  
  1.85
  
  0.99
  
  105,212August
  
  1.36
  
  0.75
  
  163,195
  
  1.40
  
  0.78
  
  130,255September
  
  1.00
  
  0.25
  
  459,212
  
  0.96
  
  0.28
  
  93,800October
  
  0.40
  
  0.08
  
  356,237
  
  0.45
  
  0.14
  
  126,500November
  
  0.25
  
  0.10
  
  167,031
  
  0.25
  
  0.10
  
  44,950December
  
  0.29
  
  0.05
  
  309,414
  
  0.35
  
  0.11
  
  89,5002009January
  
  0.29
  
  0.14
  
  129,825
  
  0.35
  
  0.16
  
  33,000February
  
  0.17
  
  0.06
  
  205,456
  
  0.18
  
  0.10
  
  56,350  38


DIRECTORS AND EXECUTIVE OFFICERS  The following table sets forth information about the
directors and executive officers of the Company:  Name and municipality of residence
  
  Position(s) held
  
  Principal occupationSteven R.
  Berlin, C.P.A.(1)(4)Tulsa, Oklahoma
  
  Director
  
  Part-time consultantC. David A.
  Comba(2)(4)Burlington, Ontario
  
  Director
  
  Graduate geologist and retired executiveAndré J. Douchane(4)(5)Toronto, Ontario
  
  Chairman and Director
  
  President and CEO, Starfield Resources Inc.Robert J. Quinn(2)(3)Houston, Texas
  
  Director
  
  Partner, Quinn & Brooks LLPGregory J. Van
  Staveren, C.A., C.P.A.(2)(3)Toronto, Ontario
  
  Director
  
  President, Strategic Financial ServicesWilliam J.
  Weymark.(3)(4)West Vancouver, BritishColumbia
  
  Director
  
  President, Weymark Engineering Ltd.William J.
  BiggarToronto, Ontario
  
  President and Chief Executive Officer
  
  Director and Officer of the CompanyG. Fraser B. Sinclair, C.A., C.A. (S.A.)Oakville, Ontario
  
  Vice President, Finance and Chief Financial
  Officer
  
  Officer of the CompanyTrent C.A.
  Mell, B.C.L., LL.B., LL.M.Toronto, Ontario
  
  Vice President, Corporate Development, General
  Counsel and Corporate Secretary
  
  Officer of the CompanyDavid J.
  PassfieldAjax, Ontario
  
  Vice President, Operations
  
  Officer of the CompanyWilliam E.
  StoneBurlington, Ontario
  
  Vice President, Exploration
  
  Officer of the Company  
 Notes:  (1)Observer at meetings of the Audit Committee.  (2)Member of the Audit Committee.  (3)Member of the Governance, Nominating and
Compensation Committee.  (4)Member of the Technical, Environment, Health
and Safety Committee.  (5)Observer at meetings of the Governance,
Nominating and Compensation Committee.  Steven R. Berlin:  Mr. Berlin was first appointed to the
board of directors of the Company in February 2001. Mr. Berlin is
also a director of Orchids Paper Products, an AMEX listed company. At the end
of 2005, Mr. Berlin retired from his position as Vice-President of KFOC
where he worked part-time for two years following four years of full-time work
as Vice-President and Chief Financial Officer. Prior to joining KFOC, Mr. Berlin
taught at the University of Tulsa for three years where he also served a year
as acting associate Dean of the College of Business as well as acting Director
of the School of Accounting. Prior to that, Mr. Berlin spent 25 years with
Citgo Petroleum Corporation, retiring as Senior VP Finance and Administration
and Chief Financial Officer. Mr. Berlin has a bachelors degree from
Duquesne University, an MBA from the University of Wisconsin Madison and has
completed the Executive Management program at Stanford University.  Mr. Berlins current term as director
will end on May 28, 2009, or when he resigns or ceases to be a director by
operation of law.  C. David A. Comba:  Mr. Comba was first appointed to the
board of directors of the Company in March 2006. Mr. Comba has over
four decades of experience as an exploration advocate and senior mining
executive. As Chief Exploration Geologist of Falconbridge Limited in Sudbury,
Ontario, he led the discovery team for Falconbridge Limiteds Thayer Lindsley
Mine. Prior to its takeover by Kinross Gold Corporation, Mr. Comba was
Vice-President, Exploration of Falconbridge Gold Corporation. Following the
takeover, he became President and Chief Executive Officer of a
Kinross-controlled junior exploration  39


company listed on the TSX. From 1998 to 2005, Mr. Comba
was Director of Issues Management with the Prospectors and Developers
Association of Canada, where he led the successful lobby effort for the
re-introduction of enhanced or super flow-through shares. Mr. Comba has
bachelors and masters degrees in geology from Queens University in Kingston,
Ontario. Mr. Combas current term as director will end on May 28,
2009, or when he resigns or ceases to be a director by operation of law.  André J. Douchane:  Mr. Douchane was first appointed to the
board of directors of the Company in April 2003. Mr. Douchane is a
mining engineer with over 35 years of mining experience managing precious
metals operations. In addition to serving as the Companys President and Chief
Executive Officer from April 2003 to January 2006, he has held senior
management positions with several international publicly traded precious metal
mining companies including Vice-President Operations of Franco and Euro-Nevada
(Newmont Mining Corporation). Prior to April 2002, Mr. Douchane was
President of Management Inc., a management consulting firm. In January 2007,
Mr. Douchane was appointed President and Chief Executive Officer of
Starfield Resources Inc., an exploration and development company in Nunavut,
Canada. Mr. Douchane also serves on the board of Osisko Exploration
Ltd.  Mr. Douchanes current term as
director will end on May 28, 2009, or when he resigns or ceases to be a
director by operation of law.  Robert J. Quinn:  Mr. Quinn was first appointed to the
board of directors of the Company in June 2006. A founding partner of the
Houston mining transactional law firm Quinn & Brooks, LLP, he has over
25 years legal and management experience, including as Vice-President and
General Counsel for Battle Mountain Gold Company. He also has extensive
experience in M&A transactions, corporate governance, public disclosure,
governmental affairs, environmental law and land management. Mr. Quinn has
a Bachelor of Science degree in Economics from the University of Denver, a
juris doctorate degree from the University of Denver College of Law and has
completed two years of graduate work in Mineral Economics at the Colorado
School of Mines. Mr. Quinn currently serves as a director on the board of
three other public companies. Mr. Quinns current term as director will
end on May 28, 2009, or when he resigns or ceases to be a director by
operation of law.  Gregory J. Van Staveren:  Mr. Van Staveren was first appointed to
the board of directors of the Company in February 2003. Mr. Van
Staveren is currently the President of Strategic Financial Services, a private
consulting company providing business advisory services. Mr. Van Staveren
is a Chartered Accountant and a Certified Public Accountant and holds a
Bachelor of Math (Honours) degree from the University of Waterloo. From February 1998
until September 2001, Mr. Van Staveren was the Chief Financial
Officer of MartinRea International Inc. (MRE:TSX), and prior to that he was
partner in the mining group of KPMG, where he provided accounting, and advisory
services to his clients. He had been with KPMG since 1980. Mr. Van
Staveren currently acts as an independent director on the board of two other
public companies and acts as the Chief Financial Officer on a part-time basis
for Starfield Resources Inc. (SRU:TSX) and AIM Health Group Inc. (AHG:TSX). Mr. Van
Staverens current term as director will end on May 28, 2009, or when he
resigns or ceases to be a director by operation of law.  William J. Weymark:  Mr. Weymark was first appointed to the
board of directors of the Company in January 2007. Mr. Weymark is
President of Weymark Engineering Ltd. a Company providing consulting services
to businesses in the private equity, construction and resource sector. Until June 2007,
Mr. Weymark was President and CEO of Vancouver Wharves/BCR Marine, a
transportation firm located on the west coast of British Columbia.  Prior to joining Vancouver Wharves in 1991, Mr. Weymark
spent 14 years in the mining industry throughout western Canada working on the
start-up and operation of several mines. 
Currently, Mr. Weymark is a director of Tirex Resources Ltd.
(TXX:TSX-V) and the Vancouver Board of Trade, VGH & UBC Hospital
Foundation Board. He is also active with the BC Lions as a Founder of their
business association and a Member of the Industry Advisory Committee for the
Norman B. Keevil Institute of Mining Engineering at the University of British
Columbia.  Mr. Weymarks current  40


term as director will end on May 28, 2009, or
when he resigns or ceases to be a director by operation of law.  William J. Biggar:  Mr.Biggar
brings significant expertise in the mining sector to North American Palladium
developed from his extensive experience in corporate finance, corporate
development and mergers & acquisitions. He has served as Senior Vice
President at Barrick Gold Corporation and The Horsham Corporation as well as
obtaining 10 years of experience in investment banking. Mr. Biggar held
the position of Executive Vice President of Magna International as well as
President and CEO of MI Developments. A Chartered Accountant, he holds Master
of Business Administration and Bachelor of Commerce (with distinction) degrees
from the University of Toronto. He most recently held the position of Managing
Director at Richardson Capital Limited.Mr. Biggars
current term as director will end on May 28, 2009, or when he resigns or
ceases to be a director by operation of law.  G. Fraser B. Sinclair:  Mr. Sinclair was appointed as the Vice
President, Finance and Chief Financial Officer of the Company in April 2007.
Mr. Sinclair brings over 20 years of diverse senior management experience
with TSX and NASDAQ listed companies, comprising financial management,
strategic planning, acquisitions and corporate restructurings. Prior to joining
North American Palladium, Mr. Sinclair ran his own independent consulting
practice providing senior level financial and business advisory services. From July 2001
to April 2004, Mr. Sinclair was the Chief Financial Officer and
Corporate Secretary of Cedara Software Corp. Mr. Sinclair earned his
Chartered Accountant designation with Arthur Young & Company and has a
Bachelor of Commerce degree from the University of the Witwatersrand in
Johannesburg, South Africa.  Trent C.A. Mell:  Mr. Mell joined the Company in April 2007
as Vice President, General Counsel and Corporate Secretary and in March 2008,
also assumed responsibility for the Companys Corporate Development
function.  He previously worked in the
corporate head offices of Barrick Gold Corporation where he acted as corporate
counsel, and Sherritt International Corporation where he was Associate General
Counsel and Assistant Secretary. Prior to joining the mining industry, Mr. Mell
worked in the Toronto offices of Stikeman Elliott LLP, where he practiced with
the firms securities law group. He holds a Bachelor of Arts in Economics and
Political Science, a Bachelor of Civil Law and a Bachelor of Common Law, each
from McGill University, and a Masters of Law degree in Securities Law from
Osgoode Hall Law School.  He has
published two articles in the Rocky Mountain Mineral Law Foundation Journal.  David J. Passfield:  Mr. Passfield was appointed Vice
President, Operations of the Company in October 2006. Mr. Passfield
is a professional engineer with almost 30 years experience in open-pit and
underground mining operations. Mr. Passfield has held management positions
with numerous mining operations located across Canada and overseas, including
the Diavik Diamond Mine in the Northwest Territories. Additionally, he worked
as a consultant for several Canadian mining and construction companies where he
advised on production and maintenance planning, equipment selection and
throughput optimization. Prior to October 2006, Mr. Passfield was
Vice-President and General Manager of Grande Cache Coal Corporation, an
operating metallurgical coal mining company located in Alberta, Canada. Prior
to May 2005 he was Manager, Mining for Diavik Diamond Mines Inc., a
subsidiary of Rio Tinto plc., which operates the Diavik Diamond Mine in the
Northwest Territories.  William E. Stone.  Dr. Stone has a Ph.D. in Geology from
the University of Western Ontario and brings over twenty-five years of
exploration experience to the Company, including significant experience with
platinum group metals and nickel-copper sulphides.  In addition to
formerly serving as Principal Geologist and Vice President of Exploration with
several Canadian and Australian listed firms, Dr. Stone also taught
economic geology and geochemistry at the University of Western Australia in
Perth.  Dr. Stone joined North American Palladium in March 2008
and will lead all of the Companys exploration  41


activities, including work at Canadian properties
such as the Lac des Iles mine, the Shebandowan West project and Shawmere as
well as exploration activities at the Arctic Platinum Project in Finland.  The number of Common Shares beneficially owned,
directly or indirectly, or over which control or direction is exercised, by all
directors and senior officers of the Company is approximately 102,000, which is
less than 1% of the Common Shares issued and outstanding. KFOC owns approximately
44% of the Companys outstanding Common Shares.  Cease
Trade Orders, Bankruptcies, Penalties or Sanctions  Mr. Berlin was a director of Ozark Airlines, Inc.,
doing business as Great Plains Airlines, Inc., which filed a voluntary
Bankruptcy Petition under Chapter 11 of the United States Bankruptcy Code in an
Oklahoma court on January 23, 2003. Mr. Berlin resigned from the
board of directors of Ozark Airlines on December 14, 2004. Ozark Airlines
filed a motion to convert the bankruptcy to Chapter 7, which was granted by the
Court on March 11, 2005.  In July 2002, the Ontario Securities Commission
issued a cease trading order against Black Pearl Minerals Consolidated Inc. for
failure to file required financial statements and reports. On October 3,
2002, the Ontario Securities Commission revoked this cease trading order.
Another cease trading order was issued by the Ontario Securities Commission
against Black Pearl Minerals Consolidated Inc. on February 3, 2004 for
failure to file financial statements. This cease trading order was revoked on February 18,
2004. David Comba, a director of the Company, was a director of Black Pearl
Minerals Consolidated Inc. from December 1998 to April 2004.  Conflicts
of Interest  There may be potential conflicts to which the directors
of the Company are subject in connection with the business and operations of
the Company. The individuals concerned are governed in any conflicts or
potential conflicts by applicable law. As of the date hereof, the following
directors and officers of the Company hold positions with other companies that
explore for or produce PGMs or have other business interests which may
potentially conflict with the interests of the Company.  In January 2007, Mr. Douchane was
appointed President and Chief Executive Officer of Starfield Resources Inc., a
TSX Venture Exchange listed company. Starfield Resources is involved in the
exploration and development of its 100% owned Ferguson Lake nickel copper
cobalt palladium platinum property located in Nunavut, Canada. Additionally, on
September 14, 2007, Mr. Van Staveren was appointed part-time Chief
Financial Officer of Starfield Resources.  Mr. Comba is a director of First Nickel Inc., a
TSX-listed company, which owns the Lockerby Mine in Sudbury, Ontario, Canada.
First Nickel Inc. is a nickel, copper and cobalt producer with platinum group
credits that is actively exploring for nickel deposits in Sudbury and
south-eastern, Ontario.  LEGAL PROCEEDINGS  The following is a summary of material legal
proceedings of which the Company is or has been a party.  In 2000, LDI and B.R. Davidson Mining &
Development Ltd. (Davidson) entered into a contract whereby Davidson agreed
to construct an expanded tailings management facility at the Lac des Iles mine
site. LDI declared Davidson to be in default of the contract on February 2,
2001 and made a demand under a labour and material payment bond issued by AXA
Pacific Insurance Company (AXA). Davidson was the principal named in the bond
and the indemnitors were B.R. Davidson Mining,  42


Atikokan Ready Mix Ltd., Blaine R. Davidson, Bruce
R. Davidson and Marlene Davidson. AXA commenced an action against the
indemnitors. All of the indemnitors other than Marlene Davidson commenced a
third party action against LDI, Sitka Corp., LDIs engineers, and Aon Reed
Stenhouse, the bond broker. In this third party action, Davidson claims under
the contract in the amount of $7.9 million, general damages for breach of
contract in the amount of $3 million, aggravated, punitive or exemplary damages
in the amount of $500,000, loss of equity and equipment in the amount of $3
million by reason of LDIs failure to pay, contribution and indemnity for any
amounts which the indemnitors are required to pay as a result of AXAs claim
against Davidson, costs, and interest. For its part, LDI has two default
judgments against Davidson and noted Davidson in default in eight other actions
in connection with subtrade claims made against Davidson which were assigned to
LDI. LDIs subtrade actions, costs orders and interest against BR Davidson
total approximately $2 million.  The Company, along with J. Patrick Sheridan,
Minerales De Copan and two other individuals, are defendants in an action
brought by Cambridge Resources Corp. (Cambridge) in the Superior Court of
Justice (Ontario). In its amended statement of claim dated September 27,
1991, Cambridge claims damages in the amount of $20 million, punitive and
exemplary damages in the amount of $5 million, a declaration that the
defendants hold any interest in an unidentified mining concession located in
Honduras, about forty miles southeast of Tegucigalpa (defined therein as the
Mining Property), on constructive trust for Cambridge, a mandatory order
requiring the defendants to deliver up all proceeds, equity interest, security
or debenture interest in whatever form relating to the Mining Property,
prejudgment and post-judgment interest and costs. The Company filed a statement
of defence dated February 7, 1992 which states, among other things, that
the Mining Property was previously known to one of the individual defendants to
be of insufficient quality to merit commercial development and that,
accordingly, the Company had declined to proceed any further with the
investigation or purchase of the Mining Property. Partial discoveries of
certain of the parties were conducted on October 6, 7 and 8, 1993. There
have been no further proceedings in the action and it has been dormant for over
14 years. No provision in the financial statements of the Company has been made
in respect of any possible loss from the action as management believes that the
Company has a valid defence and the Sheridan Group has indemnified the Company.  A dispute with the Companys insurer relating to the
failure of the Companys primary crusher in 2002 at the Lac des Iles mine was
settled in June 2008.  Under the
settlement, the Company received a cash payment of $14.5 million, which was in
addition to a $7.1 million insurance recovery received in 2004.  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 individually and in the aggregate, even
if adversely settled, would not be expected to have a material effect on the
results of operations or financial condition of the Company and would not
exceed ten percent of the current assets of the Company.  INTERESTS OF
MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS  No director, executive officer, shareholder owning,
directly or indirectly, or exercising control or direction over, 10% or more of
the voting securities of the Company or any associate or affiliate of any of
the foregoing has or had a material interest, direct or indirect in any
transaction since January 1, 2006 that has materially affected or will
materially affect the Company, except as follows:  (i)KFOC is a party to the credit
facilities described under Financing  KFOC Credit Facilities.  (ii)KFOC is a party to the
Securities Purchase Agreement described under Financing  Convertible Note
Financing.  43


(iii)KFOC exercised its pre-emptive
right pursuant to the Securities Purchase Agreement to subscribe for 25% of the
units at the public offering price of the offering of December 13, 2007
and the subsequent over-allotment option of January 9, 2007.  See Financing-Public Offering above.  TRANSFER AGENT  Computershare Investor Services Inc. is the
registrar and transfer agent of the Common Shares in Canada, and Computershare
Trust Company, N.A. is the co-transfer agent for the Common Shares in the
United States. Computershare Trust Company of Canada is the trustee and
transfer agent for the Warrants  MATERIAL CONTRACTS  The option and joint venture agreement with Vale
Inco governing the Shebandowan Joint Venture described in the section titled
Business Overview  Shebandowan West Project and the smelting and refining
agreement with Xstrata described in the section titled Lac des Iles Mine 
Overview  Smelting and Refining are the only contracts that are material to
the Company and are still in effect.  INTERESTS OF EXPERTS  Information relating to the Companys mineral
properties in this AIF has been derived from reports prepared by Scott Wilson
RPA, Deborah A. McCombe, Ian T. Blakley, Richard E. Routledge, Jason J. Cox,
F.H. Brown, Laila Potvin, David Penna and Des Cullen and has been included in
reliance on such persons expertise. Each of Deborah A. McCombe, Ian T.
Blakley, Richard E. Routledge, Jason J. Cox, Eugene Puritch, Wayne Ewert, F.H.
Brown, David King, Laila Potvin, David Penna and Des Cullen is a qualified
person as such term is defined in NI 43-101 and, with the exception of Laila
Potvin (who was an employee of the Company) and David Penna (who is currently
an employee of the Company), is independent from the Company.  None of Scott Wilson RPA, Deborah A. McCombe,
Ian T. Blakley, Richard E. Routledge, Jason J. Cox, F.H. Brown, Laila Potvin,
David Penna and Des Cullen, each being companies or persons who have prepared
or supervised the preparation of reports relating to the Companys mineral
properties, or any director, officer, employee or partner thereof, as
applicable, received or has received a direct or indirect interest in the
property of the Company or of any associate or affiliate of the Company. As at
the date hereof, the aforementioned persons and persons at the companies
specified above who participated in the preparation of such reports, as a
group, beneficially own, directly or indirectly, less than one percent of the
outstanding securities of the Company.  The auditors of the Company are KPMG LLP (KPMG),
Chartered Accountants, of Toronto, Ontario. 
KPMG report that they are independent of the Company in accordance with
the Rules of Professional Conduct of the Institute of Chartered
Accountants of Ontario and in accordance with the applicable rules and
regulations of the SEC. KPMG is registered with the Public Company Accounting
Oversight Board.  Neither the aforementioned persons, nor any
director, officer, employee or partner, as applicable, of the aforementioned
companies or partnerships, is currently expected to be elected, appointed or
employed as a director, officer or employee of the Company or of any associate
or affiliate of the Company.  RISK FACTORS  The Companys securities are subject to the
following risks. If any of the risks occur, the Companys business, operating
results and financial condition could be materially adversely affected, the
trading price of the Common Shares could decline and all or part of any
investment may be lost.  Additional risks
and uncertainties not currently known to the Company, or that are currently
deemed immaterial, may also materially and adversely affect the Companys
business operations.  44


A prolonged suspension of
production at the Lac des Iles mine will adversely impact the financial position
of the Company.  The Company derives all of its revenue from the Lac
des Iles mine.  As of October 29,
2008, the Company placed the Lac des Iles mine, its only producing mine, on
care and maintenance as a result of declining metal prices.  While the Company believes that metal prices
will eventually return to historical averages, there is no guarantee when or
even if this will occur.  A sustained
period of depressed metal prices, resulting in a lengthy period of suspension
in production at the Lac des Iles mine, will result in a significant loss of
revenue for this period and could have a material adverse impact on the
financial position and results of operations of the Company. If the Lac des
Iles mine remains idle for a sustained period of time or were to be permanently
shut down, the Company may be unable to continue as a going concern.  A prolonged shutdown could also make it more
difficult for the Company to recruit qualified employees.  The Companys financial results
are directly affected by commodity prices.  The Companys earnings are directly related to
commodity prices as its revenues are derived from sales of palladium and, to a
lesser extent, by platinum, gold, nickel and copper produced from its Lac des
Iles mine, which is currently idled. The Companys current policy and practice
is not to sell forward its production. Commodity prices can fluctuate widely
and are affected by numerous factors beyond the Companys control, including
production at other mines, supply from recycling, producer hedging activities,
the state of the automotive industry, other production and investor demands and
overall political and economic conditions. The price of palladium is affected
by global supply and demand for the commodity, the availability and cost of
substitutes and supply from Russia and South Africa, the two major PGM
producing countries. Further, the price of palladium and platinum have on
occasion been subject to very rapid short-term changes because of the smaller
size of the market relative to other metals. The aggregate effect of these
factors is impossible to predict with any accuracy.  The current depressed price for most metals,
including palladium, have and will continue to adversely affect the Companys
financial performance and results of operations. The Companys primary source
of revenue is the sale of palladium, which accounted for approximately 45% of
the Companys revenue in 2008 and 47% of the Companys revenues in 2007.
Historically, changes in the market price of palladium have significantly
impacted the Companys profitability and the trading price of the Common
Shares. Since the market prices of palladium and by-product metals have fallen
below the Companys total cash costs of production, the Company suspended
operations at its Lac des Iles mine.  Deterioration of economic
conditions will adversely impact revenues of the Company.  The deterioration in the U.S. and global capital
markets, the financial services industry and economic conditions generally,
could continue to negatively impact the Companys business in several
ways.  For instance, market volatility,
tight credit markets and the decline in the U.S. housing market has adversely
affected consumer confidence and reduced business activity, both of which have
negatively impacted the Companys revenues and the market price of the Common
Shares since PGMs are used in the production of consumer items such as
automobiles, electronics and jewellery. In addition, some purchasers of PGMs,
such as automobile manufacturers, could experience serious cash flow problems
due to the deteriorating global capital markets. PGM purchasers may be forced
to reduce their product lines or production, shut down their operations or file
for bankruptcy protection, which would have a material adverse effect on the
Companys business. The Company does not expect that the difficult economic
conditions faced by the automotive sector, the most important consumer of PGMs,
will improve before 2010, and any continuation or worsening of the economic
downturn will continue to adversely affect the Company.  45


Fluctuations in foreign currency
exchange rates in relation to the U.S. dollar may adversely affect the
Companys results of operations.  The Companys operating results and cash flows are
significantly affected by changes in the Canadian dollar/U.S. dollar exchange
rate. Exchange rate movements can have a significant impact as all of the
Companys revenues are earned in U.S. dollars but most of its operating and
capital costs are incurred in Canadian dollars. As a result, if and when mining
operations resume, a strengthening Canadian dollar relative to the U.S. dollar
will result in reduced revenues for the Company. The Canadian dollar/U.S.
dollar exchange rate has varied significantly over the last several years. The
Company does not currently hedge its foreign exchange exposure against the
effects of currency fluctuations. There can be no assurance that foreign
exchange fluctuations will not materially adversely affect the Companys
financial performance and results of operations.  The Company may not meet its
production level and operating cost estimates and, if it does not, its results
of operations may be adversely affected.  Planned production levels and operating costs are
estimated based on the Companys experience in operating the Lac des Iles mine.
These estimates are subject to numerous uncertainties, many of which are beyond
the Companys control. The Company cannot give assurances that its actual
production levels will not be substantially lower than its estimates or that
its operating costs will not be materially higher than anticipated. For
example, production levels for 2008, and potentially beyond, will be
considerably lower than initial estimates as a result of the decision to place
the Lac des Iles mine on temporary care and maintenance.  Calculation of mineral resources,
mineral reserves and metal recovery are only estimates, and there can be no
assurance about the quantity and grade of minerals until the metals are
actually mined.  The calculation of mineral resources, mineral
reserves and grades are merely estimates and depend on geological
interpretation and statistical inferences or assumptions drawn from drilling
and sampling analysis, which might prove to be unpredictable. Mineral resources
that are not mineral reserves do not have demonstrated economic viability and
mineral reserve estimates are based on certain assumptions, including metal
prices. Until mineral resources or mineral reserves are actually mined and
processed, the quantity of reserves or resources and their respective grades
must be considered as estimates only. Any material change in the quantity of
mineral resources, mineral reserves, grade or stripping ratio may affect the
economic viability of the Companys properties.  Decreases in the
market price of palladium or other metals may render the mining of some or all
of the reserves uneconomic.  Although the Corporation has carefully prepared and
verified the mineral resource and reserve figures presented in the documents
incorporated by reference to this prospectus, such figures are estimates, which
are, in part, based on forward-looking information, and no assurance can be
given that the indicated level of palladium, platinum, gold, nickel and copper
will be produced. Estimated reserves may have to be recalculated based on
actual production experience. Market price fluctuations of these metals, as
well as increased production costs or reduced recovery rates and other factors,
may render the present proven and probable reserves unprofitable to develop at
a particular site or sites for periods of time.  The mineral reserve estimates in the LDI Report, which
includes or updates technical information from the Offset Zone Report, assume
long-term prices of US$350/oz palladium, US$1,400/oz platinum, US$850/oz gold,
US$6.50/lb nickel and US$2.00/lb copper. The mineral reserve estimates in the
Offset  46


Zone Report assume long-term prices of US$325/oz
palladium, US$1,000/oz platinum, US$550/oz gold, US$11/lb nickel and US$2.50/lb
copper. The mineral reserve estimates in the Shebandowan Report assume 18-month
trailing average metal prices of US$300/oz palladium, US$750/oz platinum,
US$400/oz gold, US$7/lb nickel and US$1.50/lb copper. Mineral reserve and
mineral resource estimates for the Lac des Iles property and Shebandowan West
project would be lower than those presented in the LDI Report, the Offset Zone
Report and Shebandowan Report if current market metal prices were assumed.  If mineral resource and reserve
estimates are not accurate, production may be less than estimated which would
adversely affect the Companys financial condition and results of operations.  The Company cannot be certain that its mineral
resource and reserve estimates are accurate and cannot guarantee that it will
recover the indicated quantities of metals. Future production could differ
dramatically from such estimates for the following reasons:  ·actual
mineralization or ore grade could be different from those predicted by
drilling, sampling, feasibility studies or technical reports;  ·increases in the
capital or operating costs of the mine;  ·changes in the
life-of-mine plan; or  ·the grade of ore
may vary over the life of the mine and the Company cannot give any assurances
that any particular mineral reserve estimate will ultimately be recovered.  The occurrence of any of these events may cause the
Company to adjust its mineral resource and reserve estimates or change its
mining plans, which could negatively affect the Companys financial condition
and results of operations. Moreover, short-term factors, such as the need for
additional development of the orebody or the processing of new or different
grades if and when operations resume, may adversely affect the Company.  Favourable market conditions from
2004 to 2007 have encouraged increased mining exploration, development and
construction activity in the mining industry, resulting in increased demand
for, and cost of, exploration, development and construction services and
equipment.  The overall strength of the metal market from 2004
to 2007 resulted in an increase in exploration, development and construction
activities around the world, resulting in increased demand for, and cost of,
exploration, development and construction services and equipment. The costs of
such services and equipment could increase in the future if such trends were to
resume, which could result in delays if services or equipment cannot be
obtained in a timely manner.  Future exploration at the Lac des
Iles mine or at the Companys exploration properties may not result in
increased mineral resources or mineral reserves, which could prevent the
Company from sustaining its targeted production levels over the long term.  As mines have a depleting asset base, the Company
actively seeks to replace and expand its mineral resources and mineral
reserves, through exploration and development, strategic acquisitions and joint
ventures. The Company has conducted exploration programs on the Lac des Iles
intrusive complex, on the Shebandowan joint venture properties and elsewhere
with the objective of increasing total mineral resources and mineral reserves.
Exploration for minerals involves many risks and uncertainties and is
frequently unsuccessful. Among the many uncertainties inherent in any
exploration and development program are the location of economic mineralized
zones, the development of appropriate metallurgical processes, the receipt of
necessary governmental permits to mine a deposit and the construction of mining  47


and processing facilities. Assuming discovery of an
economic mineralized zone, several years may elapse from the completion of the
exploration phase until commercial production commences and during such time
the economic feasibility of production may change. There can be no assurance
that the Companys current exploration and development programs will result in
economically viable mining operations or yield new mineral resources and
mineral reserves to replace current mineral resources and mineral reserves.
This could prevent the Company from sustaining its targeted production levels
over the long term, which could affect its ability to continue as a going
concern.  Risks of Acquisitions and the
Failure to Integrate Acquired Mining Properties  As part of its development strategy, the
Company intends to acquire additional mining properties, including gold
properties, where such transactions are economically and strategically
justified. However, there can be no assurance that the Company will be able to
identify attractive acquisition candidates in the future or that it will
succeed at effectively managing the integration of acquired mining properties.
If the expected synergies from such transactions do not materialize, or if the
Company fails to successfully integrate such new mining properties into its
existing business, or if acquired businesses or properties have unexpected
liabilities, the Companys results of operations could be adversely affected.  The Company has a history of
losses and no immediately foreseeable earnings.  The Company has a history of losses, and there can
be no assurance that it will ever be profitable. The Company expects to
continue to incur losses unless and until such time as it resumes production at
the Lac des Iles mine, develops and commences mining operations at the Offset
Zone or the Shebandowan West Project or it completes a corporate transaction
for new operating assets. There can be no assurance that the Company will ever
achieve profitability.  The risks and hazards associated
with mining and processing may increase the Companys costs and reduce its
profitability in the future.  Mining and processing operations involve many risks
and hazards, including, among others: metallurgical and other processing
problems; unusual and unexpected rock formations; pit slope failures or
underground cave-ins; environmental contamination; industrial accidents; fires;
flooding and periodic interruptions due to inclement or hazardous 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, including to the Companys employees; environmental damage;
delays in mining; increased production costs; asset write downs; monetary
losses; and legal liability.  The Company cannot be certain that its insurance
will cover all of the risks associated with mining or that it will be able to
maintain insurance to cover these risks at affordable premiums. The Company
could also become subject to liability for environmental contamination or other
hazards against which it cannot insure or against which the Company may elect
not to insure because of high premium costs or other reasons. Losses from such
events may increase costs and decrease profitability.  The Companys failure to maintain
projected production levels for its underground or open pit mining operations
will adversely affect its ability to generate revenue and profits.  The Companys future prospects will be negatively
affected if the Lac des Iles mine fails to maintain projected production
levels. This is increasingly likely as a result of the decision to place the
Lac des Iles mine on care and maintenance as of October 29, 2008.  If and when the Lac des Iles mine resumes  48


operations, unforeseen conditions or developments
could arise during the ongoing development and operation of the underground
mine which could increase costs and adversely affect the Companys ability to
generate revenue and profits. These events may include, among others: shortages
or unanticipated increases in the cost of equipment, materials or skilled
labour; delays in delivery of equipment or materials; labour disruptions;
adverse weather conditions or natural disasters; accidents; unforeseen
engineering, design, environmental or geological problems, and; unanticipated
changes in the life-of-mine plan or the ultimate pit design.  Title to the Companys mineral
properties cannot be guaranteed and may be subject to prior recorded and
unrecorded agreements, transfers or claims and other defects and potential
aboriginal rights claims.  Although the Lac des Iles mine has been in operation
for 15 years, the Company cannot guarantee that title to its properties will
not be challenged. Title insurance is generally not available for mineral
properties and the Companys ability to ensure that it has obtained secure
claim to individual mineral properties or mining concessions may be severely
constrained. The Companys mineral properties may be subject to prior recorded
and unrecorded agreements, transfers or claims, and title may be affected by,
among other things, undetected defects. Additionally, there can be no guarantee
that potential aboriginal rights claims to the Companys mineral properties
will not create delays in project approval, unexpected interruptions in project
progress or result in additional costs to advance the project. A successful
challenge to the area and location of these claims could result in the Company
being unable to operate on its properties as permitted or being unable to
enforce its rights with respect to its properties.  The Company is dependent on a
third party for smelting and significantly refining its palladium. If the third
party is unable to accommodate the Companys smelting and refining requirements
or the existing contract is terminated or not renewed, the Companys ability to
generate revenues could be harmed.  The Company has a smelter agreement with Xstrata
Canada Company, which provides for the smelting and refining of the principal
metals contained in the concentrates produced at the Lac des Iles mine. The
existing agreement with Xstrata expires on March 31, 2010 but may be
extended for two additional one-year terms. Xstrata may terminate the agreement
prior to the expiry date under certain conditions. For instance, Xstrata could
potentially argue that the temporary suspension of activities at the Lac des
Iles mine constitutes an event of force majeure, entitling it to terminate the
agreement. The termination of the agreement or the failure to renew the
agreement on acceptable terms, or at all, could have a material adverse effect
on the Companys financial performance and results of operations until such
time as alternative smelting and refining arrangements could be made or
alternative purchasers of the Companys concentrates could be found. If the
Company is required to make alternative refining arrangements or to find
alternative purchasers, there can be no assurance that such arrangements would
be on terms as favourable to the Company as its existing agreement with
Xstrata.  Increased competition could
adversely affect the Companys ability to acquire suitable producing properties
or prospects for mineral exploration in the future.  The mining industry is intensely competitive. The
Company may be at a competitive disadvantage in acquiring additional mining
properties because it must compete with other individuals and companies, many
of which have greater financial resources, operational experience and technical
capabilities than the Company. As a result, for reasons beyond its control, the
Company may not be able to acquire mining properties in the future on
acceptable terms.  49


The exploration and development
of the Companys properties will require substantial additional financing.  The exploration and development of the Companys
properties will require substantial additional financing. Failure to obtain
sufficient financing may result in the delay or indefinite postponement of
exploration activities, development or production on any or all of the
Companys properties or even a loss of property interest. There can be no
assurance that additional capital or other types of financing will be available
if needed or that, if available, the terms of such financing will be favourable
to the Company.  The Companys inability to renew
its collective agreement on acceptable terms could have a material adverse
effect on the Company.  The Companys collective agreement with the United
Steelworkers of America, the union representing the hourly employees at the Lac
des Iles mine, expired in February 2009. The inability to renew the
agreement on acceptable terms could have a material adverse effect on the
Company and could potentially delay or prevent the re-opening of the mine. In
addition, work stoppages or strikes at the Lac des Iles mine, if and when
reopened, could have a material adverse effect on the results of operations and
financial performance of the Company.  The Company is subject to
extensive environmental legislation and the costs of complying with these
applicable laws and regulations may be significant.  The Companys operations are subject to extensive
environmental legislation. This legislation requires the Company to obtain
various operating approvals and licenses and also imposes standards and
controls on activities relating to the exploration, development and production
of palladium and by-product metals.  The cost to the Company of obtaining operating
approvals and licenses and abiding by environmental legislation, standards and
controls may be significant. Further, if the Company fails to obtain or
maintain such operating approvals or licenses or breaches such legislation,
standards or controls, it may not be able to continue its operations in its
usual manner or at all, and the Company may be subject to fines or other
liabilities which may have a material adverse impact on its operations or
financial results.  The Company will be responsible for all costs of
closure and reclamation at the Lac des Iles mine. Under applicable legislation,
the Company has established a trust fund to prepare for closure and
reclamation. The current amended mine closure plan requires the payment by the
Company of $8.4 million for cleanup and restoration of the mine site. The trust
fund is maintained by the Ontario Ministry of Northern Development and Mines
and will become available to the Company when the mine closure is
completed.  At February 18, 2009,
approximately $8.4 million (including accrued interest) had been deposited by
the Company into the trust fund.  Changes in environmental legislation or in its
enforcement, new information on existing environmental conditions or other
events, including changes in environmental controls or standards or in their
enforcement, may increase future environmental expenditures or otherwise have a
negative effect on the Companys financial condition and results of operations.
In addition to existing requirements, it is expected that other environmental
legislation may be implemented in the future with the objective of further
protecting human health and the environment. New environmental legislation or
changes in existing environmental legislation could have a negative effect on production
levels, product demand, product quality and methods of production and
distribution. The complexity and breadth of these issues make it difficult for
the Company to predict their impact. The Company anticipates capital
expenditures and operating expenses would likely increase as a result of
compliance with new or more stringent environmental legislation.  50


Failure to comply with environmental legislation may
result in the issuance of governmental orders, the imposition of penalties,
liability for related damages and the loss of operating licenses or approvals.
The Company cannot give assurances that it will at all future times be in
compliance with all federal and provincial environmental legislation or that
steps to bring the Company into compliance would not have a negative effect on
its financial condition and results of operations.  Compliance with current and
future government regulations may cause the Company to incur significant costs.  The Companys activities are subject to extensive
Canadian federal and provincial legislation governing matters such as mine
safety, occupational health, labour standards, prospecting, exploration,
production, exports, toxic substances, explosives, management of natural
resources, price controls, land use, water use and taxes. Compliance with this
and other legislation could require the Company to make significant capital
outlays. The enactment of new legislation or more stringent enforcement of
current legislation may increase costs, which could have a negative effect on
the Companys financial position. The Company cannot make assurances that it
will be able to adapt to these regulatory developments on a timely or cost
effective basis. Violations of these laws, regulations and other regulatory
requirements could lead to substantial fines, penalties or other sanctions
including possible shut-downs of the Lac des Iles mine and future operations,
as applicable.  The Company is required to obtain
and renew governmental permits in order to conduct mining operations, which is
often a costly and time-consuming process.  Throughout the normal course of business, the
Company is required to obtain and renew governmental permits for exploration,
operations and expansion of existing operations or for the development of new
projects. Obtaining or renewing governmental permits is a complex and
time-consuming process. The duration and success of permitting efforts are
contingent upon many variables not within the Companys control, including the
interpretation of requirements implemented by the applicable permitting
authority. The Company may not be able to obtain or renew permits that are
necessary to its operations, or the cost to obtain or renew permits may exceed
the Companys expectations. Any unexpected delays or costs associated with the
permitting process could delay the development or impede the operation of the
mine, which could materially adversely affect the Companys revenues and future
growth, if and when the Lac des Iles mine reopens.  The Company faces competition
from other larger suppliers of platinum group metals and from potential new
sources of platinum group metals.  The Company competes globally with other PGM
producers and suppliers, some of which are significantly larger and have access
to greater mineral reserves and financial resources. In addition, recycling and
new mines could increase the global supply of palladium and platinum. The
Company may not be successful in competing with these existing and emerging PGM
producers and suppliers.  The development of new technology
or new alloys could reduce the demand for palladium and platinum.  Demand for palladium and platinum may be reduced if
manufacturers in industries such as the automotive sector, the electronics
sector and dentistry find substitutes for palladium or platinum. The
development of a substitute alloy or synthetic material which has catalytic
characteristics similar to PGMs could result in a decrease in demand for
palladium and platinum. Furthermore, the development by the automobile industry
of automobiles that do not use catalytic converters could significantly reduce
the demand for palladium and platinum. High prices for palladium or platinum
would create an incentive for the  51


development of substitutes. Any such developments
could have a material adverse effect on the Companys financial condition and
results of operations.  If the Company loses key
personnel or is unable to attract and retain personnel, the Companys mining
operations and prospects could be significantly harmed.  The Company is dependent upon the services of a
small number of members of senior management including William J. Biggar, the
Companys President and Chief Executive Officer. The Companys current
operations and its future prospects depend on the experience and knowledge of
these individuals. The Company does not maintain any key man insurance. The
loss of one or more of these individuals could have a material adverse effect
on the Companys mining operations and results of operations.  The Companys credit facilities
provide for events of default, some of which are beyond the Companys control.  The Company has borrowed funds under its credit
facilities to finance its operations. The credit facilities contain certain
events of default, some of which are beyond the Companys control, the
occurrence of which could require the Company to pay back immediately all
amounts borrowed under the credit facilities.  The Companys principal
shareholder has the ability to direct the Companys affairs and business and,
because the principal shareholder owns approximately 44% of the Common Shares,
third parties may be deterred from acquiring the Company.  To the Companys knowledge, KFOC owns Common Shares
representing approximately 44% of the total number of Common Shares outstanding
as at January 13, 2009. KFOC, therefore, has the ability to direct the
affairs and business of the Company and it cannot be assumed that the interests
of KFOC will coincide with those of the Company. This concentration of
ownership results in KFOC having the ability to elect the Companys board of
directors and may have the effect of delaying or preventing a change in control
of the Company, which may deprive the Companys shareholders of a control
premium that might otherwise have been realized in connection with an
acquisition of the Company. Alternatively, if KFOC sells its shareholdings to a
third party, the new purchasing shareholder would obtain a considerable
controlling interest in the Company. There can be no assurance that the
interests of such a shareholder would be consistent with the plans of the
Company as described in this AIF or that such a sale would not decrease the
value of the Common Shares.  The Companys hedging activities
or its decision not to hedge could expose it to losses.  From time to time, the Company may in the future
engage in hedging activities to manage its exposure related to currencies,
interest rates and commodity prices. While hedging related to realized metal
prices may protect the Company against low metal prices, it may also limit the
price the Company can receive on hedged products. As a result, the Company may
be prevented from realizing possible revenues in the event that the market
price of a metal exceeds the price stated in a forward sale or call option
contract. In addition, the Company may experience losses if a counterparty
fails to purchase under a contract when the contract price exceeds the spot
price of a commodity.  Lack of infrastructure could
delay or prevent the Company from developing its projects.  Completion of the development of the Companys
advanced exploration projects is subject to various requirements, including the
availability and timing of acceptable arrangements for electricity or other
sources of power, water and transportation facilities. The lack of availability
on acceptable terms or the  52


delay in the availability of any one or more of
these items could prevent or delay development of the Companys advanced
exploration projects. If adequate infrastructure is not available in a timely
manner, there can be no assurance that: the development of the Companys
projects will be completed on a timely basis, if at all; the resulting
operations will achieve the anticipated production volume; or the ongoing
operating costs associated with the development of the Companys advanced
projects will not be higher than anticipated.  Current and future litigation and
regulatory proceedings may impact the revenue and profits of the Company.  The Company may be subject to civil claims
(including class action claims) based on allegations of negligence, breach of
statutory duty, public nuisance or private nuisance or otherwise in connection
with its operations or investigations relating thereto. While the Company is
presently unable to quantify its potential liability under any of the above
heads of damage, such liability may be material to the Company and may materially
adversely affect its ability to continue operations.  In addition, the Company may be subject to actions
by governmental or regulatory authorities in connection with its activities at
the Lac des Iles mine or related investigations. Such actions may include
prosecution for breach of relevant legislation or failure to comply with the
terms of the Companys licenses and permits and may result in liability for
pollution, other fines or penalties, revocations of consents, permits,
approvals or licenses or similar actions, which could be material and may
impact the results of operations of the Company. The Companys current
insurance coverage may not be adequate to cover any or all the potential
losses, liabilities and damages that could result from the civil and/or
regulatory actions referred to above.  The Company may fail to achieve
and maintain adequate internal control over financial reporting pursuant to the
requirements of the Sarbanes-Oxley Act.  The Company documented and tested during its most
recent fiscal year its internal control procedures in order to satisfy the
requirements of Section 404 of the Sarbanes-Oxley Act (SOX). SOX
requires an annual assessment by management of the effectiveness of the
Companys internal controls over financial reporting and, for fiscal years
commencing with our fiscal year ending December 31, 2007, an attestation
report by the Companys independent auditors addressing this assessment. The
Company may fail to achieve and maintain the adequacy of its internal controls
over financial reporting as such standards are modified, supplemented, or
amended from time to time, and the Company may not be able to ensure that it
can conclude, on an ongoing basis, that it has effective internal controls over
financial reporting in accordance with Section 404 of SOX. The Companys
failure to satisfy the requirements of Section 404 of SOX on an ongoing,
timely basis could result in the loss of investor confidence in the reliability
of its financial statements, which in turn could harm the Companys business
and negatively impact the trading price of the Common Shares or the market
value of its other securities. In addition, any failure to implement required
new or improved controls, or difficulties encountered in their implementation,
could harm the Companys operating results or cause it to fail to meet its
reporting obligations. Future acquisitions of companies, if any, may provide
the Company with challenges in implementing the required processes, procedures
and controls in its acquired operations. No evaluation can provide complete
assurance that the Companys internal controls over financial reporting will
detect or uncover all failures of persons within the Company to disclose
material information otherwise required to be reported. The effectiveness of
the Companys processes, procedures and controls could also be limited by
simple errors or faulty judgments. In addition, if the Company expands, the
challenges involved in implementing appropriate internal controls over financial
reporting will increase and will require that the Company continue to improve
its internal controls over financial reporting. Although the Company  53


intends to devote substantial time and incur
substantial costs, as necessary, to ensure ongoing compliance, the Company
cannot be certain that it will be successful in complying with Section 404.  Because the Company is a Canadian
corporation and the majority of its directors and officers are resident in Canada,
it may be difficult for investors in the United States to enforce civil
liabilities against the Company based solely upon the federal securities laws
of the United States.  The Company is a Canadian corporation, with its
principal place of business in Canada. A majority of the Companys directors
and officers named in this AIF and some or all of the experts named in this AIF
are residents of Canada and a significant portion of the Companys assets and
the assets of a majority of the Companys directors and officers and the
experts named in this AIF are located outside the United States. Consequently,
it may be difficult for U.S. investors to effect service of process within the
United States upon the Company or its directors or officers or such experts who
are not residents of the United States, or to realize in the United States upon
judgments of courts of the United States predicated upon civil liabilities
under the U.S. Securities Act. Investors should not assume that Canadian courts
(1) would enforce judgments of U.S. courts obtained in actions against the
Company or such directors, officers or experts predicated upon the civil
liability provisions of the U.S. federal securities laws or the securities or
blue sky laws of any state within the United States or (2) would
enforce, in original actions, liabilities against the Company or such
directors, officers or experts predicated upon the U.S. federal securities laws
or any such state securities or blue sky laws.  In addition, the protections afforded by
Canadian securities laws may not be available to investors in the United
States.  AUDIT COMMITTEE INFORMATION  Audit
Committee Mandate  The Audit Committee mandate is set out beginning on page 57.  Composition
of the Audit Committee  The Audit Committee is comprised of Mr. Gregory
J. Van Staveren (Chairman), Mr. David Comba and Mr. Robert Quinn. Mr. Van
Staveren, Mr. Comba and Mr. Quinn are independent as such term is
defined in National Instrument 52-110  Audit Committees (NI 52-110).  Mr. Berlin attends the meetings of the
Committee in the capacity of an observer but he is not a member of the Audit
Committee and he does not exercise any voting powers. He has been provided with
observer status as a result of his significant financial expertise, particularly
with respect to U.S. accounting matters. Mr. Berlin is not considered
independent, as that term is defined by virtue of the fact that prior to January 1,
2006, Mr. Berlin served as an executive officer of KFOC, which owns
approximately 44% of the outstanding common shares of the Company.  Mr. Berlin does satisfy the requirements
of Rule 10A-3 under the U.S. Securities Exchange Act of 1934 (the
Exchange Act).  Further, Mr. Berlin
is a certified public accountant and has considerable experience in corporate
finance.  Relevant
Education and Experience  Each of the members of the Audit Committee is
financially literate. Each of Mr. Van Staveren and Mr. Berlin
satisfies the criteria required to be a financial expert and Mr. Van
Staveren is designated as the Audit Committees financial expert. Mr. Van
Staveren is a chartered accountant and a certified public accountant. He was
Chief Financial Officer of Martinrea International Inc. an automotive parts
manufacturer from February 1998 to September 2001 and currently
provides strategic financial services to various companies. Prior to February 1998,
Mr. Van Staveren was a partner with KPMG.  54


Mr. Berlin is a certified public accountant
and, prior to January 1, 2006, was a Vice President of KFOC and prior to December 2004
was Co-Chief Financial Officer of KFOC. Mr. Berlin also served as Chief
Financial Officer and Treasurer of PetroCorp Incorporated, an oil and gas
company prior to January 2004.  Both Mr. Comba and Mr. Quinn have
extensive management experience with extensive focus in the mining sector.  Reliance
on Certain Exemptions  The Company is relying on the exemption contained in
section 3.5 (Death, Disability or
Resignation of Audit Committee Member) of NI 52-110 in connection
with Mr. Berlins attendance at meetings of the Audit Committee.  Audit
Committee Pre-Approval Policies and Procedures  All audit and non-audit services performed by the
Companys external auditors are pre-approved by the Audit Committee.  External
Auditor Service Fees  Audit
Fees  The aggregate fees billed by KPMG, the Companys
external auditors for the fiscal years ended December 31, 2008 and 2007,
for professional services that are normally provided by the external auditors
in connection with statutory and regulatory filings or engagements for that
year were $544,175 and $545,771, respectively.  Audit-Related
Fees  The aggregate fees billed by KPMG for the fiscal
years ended December 31, 2008 and 2007 for assurance and related services
rendered by it that are reasonably related to the performance of the audit or
review of the Companys financial statements engagements for that year were
$75,900 and $362,400, respectively.In 2008, such
fees were paid for services rendered in connection with a prospectus offering
($59,250), and services in connection with French translation of the prospectus
($16,650).  Tax
Fees  The aggregate fees billed by KPMG for the fiscal
years ended December 31, 2008 and 2007 for professional services rendered
by it for tax compliance, tax advice, tax planning and other services were
$88,250 and $19,300, respectively. Tax services provided included preparation
of corporate tax returns and review of tax provisions.In
2008, such fees were paid for preparation of federal/provincial tax returns and
an Ontario mining tax return for December 31, 2007 ($18,000), assistance
with the Ontario mining tax assessment ($43,900) and flow-through shares
remuneration ($18,250), and correspondence and discussions related to investments
in Finland ($7,600).  All
Other Fees  Other products and services provided included
accounting support. The aggregate fees billed by KPMG for the fiscal years
ended December 31, 2008 and 2007 for products and services provided by
KPMG, other than the services reported in the preceding three paragraphs, were
$nil and $nil, respectively.  55


ADDITIONAL
INFORMATION  We are
required to file with the securities commission or authority in each of the
applicable provinces of Canada annual and quarterly reports, material change
reports and other information. In addition, we are subject to the informational
requirements of the Exchange Act, and, in accordance with the Exchange Act, we
also file reports with, and furnish other information to, the SEC. Under a
multijurisdictional disclosure system adopted by the United States, these
reports and other information (including financial information) may be prepared
in accordance with the disclosure requirements of Canada, which differ in
certain respects from those in the United States. As a foreign private issuer,
we are exempt from the rules under the Exchange Act prescribing the
furnishing and content of proxy statements, and our officers, directors and
principal shareholders are exempt from the reporting and short swing profit
recovery provisions contained in Section 16 of the Exchange Act. In
addition, we are not required to publish financial statements as promptly as
U.S. companies.  You may read
any document we file with or furnish to the securities commissions and
authorities of the provinces of Canada through SEDAR and any document we file
with or furnish to the SEC at the SECs public reference room at Station Place,
100 F Street, N.E., Washington, D.C. 20549. You may also obtain copies of the
same documents from the public reference room of the SEC at 450 Fifth Street,
N.W., Washington D.C. 20549 by paying a fee. Please call the SEC at
l-800-SEC-0330 for further information on the public reference rooms. Certain
of our filings are also electronically available from the SECs Electronic
Document Gathering and Retrieval System, which is commonly known by the acronym
EDGAR, and which may be accessed at www.sec.gov, as well as from commercial
document retrieval services.  Additional
information, including directors and officers remuneration and indebtedness,
principal holders of the Companys securities and securities authorized for
issuance under equity compensation plans, is contained in the Companys
management proxy circular. As well, additional financial information is
provided in the Companys annual financials statements for the year ended December 31,
2008 and managements discussion and analysis of operations and financial
results.  56


AUDIT COMMITTEE MANDATE  1.Composition  The Audit
Committee shall consist of a minimum of three directors of the Company.  The
Audit Committee shall be comprised entirely of independent directors, as such
term is defined by applicable laws and related rules and regulations, and rules of
relevant stock exchanges (collectively referred to as Applicable Laws).  For clarity, US Applicable Laws means those
applicable to foreign private issuers.  Notwithstanding
the foregoing sentence, a member is exempt from the independence requirements
if permitted by Applicable Laws.  The
appointment of the non-independent director shall be disclosed in the next
proxy circular mailed to shareholders. If there is reliance on curing
provisions, notice shall be given to the stock exchanges immediately upon
learning of the circumstances that resulted in the non-compliance.  a)A quorum for the transaction of business
at all meetings of the Audit Committee shall be a majority of members.  2.Qualifications and Experience  At the time of
appointment or within a reasonable period of time following appointment, each
member of the Committee must be financially literate, having the ability to
read and understand a set of financial statements that present the breadth and
level of complexity or accounting issues that are generally comparable to the
breadth and complexity of the issues that can be reasonably be expected to be
raised by the Companys financial statements.  a)At least one member (the financial
expert) of the Committee must have:  i.An understanding of financial statements
and accounting principles used by the Company to prepare its financial
statements;  ii.The ability to assess the general
application of such accounting principles in connection with the accounting for
estimates, accruals and reserves;  iii.Experience preparing, auditing, analyzing
or evaluating financial statements that present a breadth and level of
complexity of accounting issues that are generally comparable to the breadth
and complexity of issues that can reasonably be expected to be raised by the
Companys financial statements, or experience actively supervising one or more
persons engaged in such activities;  iv.An understanding of internal controls and
procedures for financial reporting; and  v.An understanding of audit committee
functions.  b)The financial expert must have acquired
the foregoing attributes through one or more of the following:  i.Education and experience as a principal
financial officer, principal accounting officer, controller, public accountant
or auditor or experience in one or more positions that involve the performance
of similar functions;  57


ii.Experience actively supervising a
principal financial officer, principal accounting officer, controller, public
accountant, auditor or person performing similar functions;  iii.Experience overseeing or assessing the
performance of companies or public accountants with respect to the preparation,
auditing or evaluation of financial statements; or  iv.Other relevant experience.  3.Mandate and Responsibilities  The Audit
Committee shall:  a)Review and assess the adequacy of the
Audit Committee mandate on an annual basis;  b)Meet with the Companys external auditors
as necessary and before the submission of the audited annual financial
statements to the Board and communicate to external auditors that they are
ultimately accountable to the Board and the Audit Committee as representatives
of shareholders;  c)Review the annual financial statements of
the Company and managements discussion and analysis and recommend the
financial statements for approval to the Board;  d)Review and approve interim financial
statements of the Company and managements discussion and analysis prior to
filing with the securities regulatory authorities and delivery to shareholders;  e)Obtain explanations from management on
all the significant variances between comparative reporting periods and, in
respect the annual financial statements, question management and the external
auditor regarding the significant financial reporting issues discussed during
the fiscal period and the method of resolution;  f)Be responsible for:  i.Ensuring that a written statement is obtained from the external
auditor describing all relationships between the external auditor and the
Company;  ii.Discussing
with the external auditor any disclosed relationships or services that may
impact the objectivity and independence of the external auditor; and  iii.Determining
that the external auditors have a process in place to address the rotation of
the lead partner and other audit partners serving the account as required under
Canadian independence standards and the SEC independence rules, as applicable
to foreign private issuers;  g)Assess the performance of the external
auditors and recommend to the Board annually or as they may otherwise determine
a duly qualified external auditor to be nominated (for appointment or
retention) for the purpose of preparing or issuing an audit report or
performing other audit, review or attest services for the Company;  h)    Review the plan and scope of the audit to be
conducted by the internal (if any) and external auditors of the Company;  i)      Approve, or recommend to the Board for
approval, the compensation of the external auditors;  58


j)Directly oversee the work of the external
auditors, including reviewing the Companys critical accounting policies and
practices, material alternative accounting treatments and material written
communications between the external auditors and management, and the resolution
of disagreements between management and the external auditor regarding
financial reporting;  k)Pre-approve all audit and permitted
non-audit services to be provided to the Company or its subsidiary entities by
its external auditors or the external auditors of the Companys subsidiary, in
accordance with Applicable Laws;  l)Review all post-audit or management
letters containing the recommendations of the external auditor and managements
response or follow-up of any identified weakness;  m)Meet separately, periodically, with
management, with internal auditors (or other personnel responsible for the
internal audit function) and with external auditors;  n)Oversee the governance of managements
Disclosure Committee;  o)Review all annual and interim earnings
press releases;  p)Determine that adequate procedures are in
place for the review of the Companys disclosure of financial information
extracted or derived from the Companys financial statements, other than
disclosure in the Companys financial statements, managements discussion and
analysis and earnings press releases, and periodically assess the adequacy of
these procedures;  q)Establish procedures for:  i.The receipt, retention and treatment of complaints received by the
Company regarding accounting, internal accounting controls, or auditing
matters; and  ii.The
confidential, anonymous submission by employees of the Company of concerns
regarding questionable accounting or auditing matters;  r)Enquire as to the adequacy of the
Companys system of internal controls and review periodic reports from
management about internal controls, including an assessment of risk with
respect to financial reporting;  s)Review and approve all related party
transactions;  t)Review and approve the Companys hiring
policies regarding employees and former employees of the present and former
external auditors of the Company;  u)Have such other duties, powers and
authorities, consistent with the provisions of the Canada Business Corporations
Act, as the Board may, by resolution, delegate to the Audit Committee from time
to time.  4.Authority  The Audit
Committee shall have the authority:  a)For the purpose of performing their
duties, to inspect all of the books and records of the Company and its
affiliates and to discuss such accounts and records and any matters relating to
the financial position  59


or condition of
the Company with the officers and internal (if any) and external auditors of
the Company and its affiliates;  b)    To engage independent counsel and other
advisors as it determines necessary to carry out its duties;  c)To set and pay the compensation for any
advisors employed by the Audit Committee, including without limitation,
compensation to any public accounting firm engaged for the purpose of preparing
or issuing and audit report or performing other audit, review or attest
services for the Company;  d)To set and pay the ordinary
administrative expenses of the Audit Committee that are necessary or
appropriate in carrying out its duties; and  e)     To communicate directly with the internal
(if any) and external auditors.  5.Proceedings  The following
shall apply to the proceedings of the Audit Committee.  a)The business of the Audit Committee shall
be transacted either at meetings thereof or by conference telephone or other
communications facilities that permit all persons participating in the meeting
to hear each other, or by resolution in writing.  All questions at a meeting shall be decided
in accordance with the vote of a majority of those present and the Chairman of
the meeting shall not have a second or casting vote.  b)A resolution in writing signed by all
members of the Audit Committee entitled to vote on that resolution at a meeting
of the Audit Committee shall be as valid as if it had been passed at a duly
called and constituted meeting.  Such
resolutions in writing may be in one or more counterparts, all of which, when
taken together, shall be deemed to constitute one resolution.  c)The Audit Committee Chairman shall
periodically report to the Board of Directors on the activities of the Audit
Committee.  d)The external auditor of the Company
shall, at the expense of the Company, be entitled to attend and be heard at or
may be invited to any meeting of the Audit Committee.  e)The external auditor and senior
management shall have the opportunity or may be invited to meet separately with
the Audit Committee.  f)     The minutes of the proceedings of the Audit
Committee and any resolutions in writing shall be kept in a book provided for
that purpose which shall always be open for inspection by any director of the Company.  60


GLOSSARY OF TERMS  The following
is a glossary of certain terms used in this document.  APP means Arctic Platinum Project, which is an advanced
stage PGM-nickel-copper exploration project located approximately 60 kilometres
south of the city of Rovaniemi, Finland.  ball mill means a rotary grinding mill
which uses metal balls to reduce ore to a fine particle size.  breccia means a textural description of a
rock which is composed of angular rock fragments.  catalyst is a substance which, when
present in small amounts, modifies the rate or efficiency of a chemical
reaction of other substances without being consumed in the process.  catalytic converter means a pollution
control device, fitted to the exhaust systems of vehicles powered by internal
combustion engines. This device contains platinum, palladium and sometimes
rhodium, which assist in the conversion (oxidation) of carbon monoxide and
hydrocarbons into carbon dioxide and water.  Common Shares means the common shares of North American
Palladium Ltd.  concentrate means a product containing the
valuable metal and from which most of the waste material in the ore has been
removed.  concentrator or processing plant
means a plant or facility which processes ore brought from the mine and removes
most of the valuable mineral or metal from the ore and discards most of the
barren portion of the ore as tailings.  cut-off grade is determined by the
following formula parameters: estimates over the relevant period of mining
costs, ore treatment costs, general and administrative costs, refining costs,
royalty expenses, process and refining recovery rates and PGM prices.  diamond drilling means rotary drilling
using diamond impregnated bits to produce a solid continuous core sample of the
underlying rock.  EM means electromagnetic.  feasibility study means a program to
establish whether a mineral deposit can be successfully mined considering
technical and economic parameters.  flotation circuit means a series of
flotation tanks or cells which recover metal by means of flotation. Flotation
is a milling process by which some mineral particles are induced to float and
others to sink. The valuable minerals are thereby concentrated and separated
from the worthless waste.  gabbro means a dark, course-grained
intrusive rock usually composed of angular rock fragments.  grade means a particular quantity of ore
or mineral relative to other constituents, in a specified quantity of rock.  head grade means the quantity of valuable
mineral or metal contained in each tonne of ore delivered to the concentrator.  61


indicated resource means that part of a
mineral resource for which quantity, grade or quality, densities, shape and
physical characteristics, can be estimated with a level of confidence
sufficient to allow the appropriate application of technical and economic
parameters, to support mine planning and evaluation of the economic viability
of the deposit. The estimate is based on detailed and reliable exploration and
testing information gathered through appropriate techniques from locations such
as outcrops, trenches, pits, workings and drill holes that are spaced closely
enough for geological and grade continuity to be reasonably assumed.  inferred resource means that part of a
mineral resource for which quantity and grade or quality can be estimated on
the basis of geological evidence and limited sampling and reasonably assumed,
but not verified, geological and grade continuity. The estimate is based on
limited information and sampling gathered through appropriate techniques from
locations such as outcrops, trenches, pits, workings and drill holes.  intrusion/intrusive means a mass of
igneous rock that was injected and solidified within the earths crust.  iridium means hard, brittle, silver-white
platinum group metal used for pen tips, jewellery, resistance wiring,
electronic contacts and electrodes.  KFOC mean Kaiser-Francis Oil Company, the Companys major
shareholder.  mafic rocks means rocks composed of 40 to
90% mafic minerals. (PGM deposits are usually hosted in mafic and untramafic
intrusive rocks).  measured mineral resource means that part
of a mineral resource for which quantity, grade or quality, densities, shape,
physical characteristics are so well established that they can be estimated
with confidence sufficient to allow the appropriate application of technical
and economic parameters, to support production planning and evaluation of the
economic viability of the deposit. The estimate is based on detailed and
reliable exploration, sampling and testing information gathered through
appropriate techniques from locations such as outcrops, trenches, pits,
workings and drill holes that are spaced closely enough to confirm both
geological and grade continuity.  measured resource means that part of a mineral resource for
which quantity, grade or quality, densities, shape and physical characteristics
are so well established that they can be estimated with confidence sufficient
to allow the appropriate application of technical and economic parameters to
support production planning and evaluation of the economic viability of the
deposit.  The estimate is based on
detailed and reliable exploration, sampling and testing information gathered
through appropriate techniques from locations such as outcrops, trenches, pits,
workings and drill holes that are spaced closely enough to confirm both
geological and grade continuity.  mineral reserve means the economically
mineable part of a measured or indicated resource demonstrated by at least a
preliminary feasibility study. This study must include adequate information on
mining, processing, metallurgical, economic and other relevant factors that
demonstrate, at the time of reporting, that economic extraction can be
justified. A mineral reserve includes diluting materials and allowances for losses
that may occur when the material is mined.  mineral resource means a concentration or
occurrence of natural, solid, inorganic or fossilized organic material in or on
the Earths crust in such form and quantity and of such a grade or quality that
it has reasonable prospects for economic extraction. The location, quantity,
grade, geological characteristics and  62


continuity of
a mineral resource are known, estimated or interpreted from specific geological
evidence and knowledge.  mineralization means the concentration of
metals and their chemical compounds within a body of rock.  net smelter return royalty means a royalty
based on the gross proceeds received from the sale of minerals less the cost of
smelting, refining, freight and other related costs.  Offset Zone means Offset High Grade Zone, a mineralized
zone located below and approximately 250 metres to the west of the Lac des Iles
underground mine orebody.  ore means a mixture of valuable and
worthless minerals from which at least one of the minerals can be mined and
processed at an economic profit.  osmium means a rare, hard white metal.  ounce or oz. is a unit of weight measure. In the precious metals
industry a troy ounce is equal to one-twelfth part of a pound or 31.103 grams.  overburden means unconsolidated material
that overlies a mineral deposit and must be removed prior to mining.  palladium means a white, ductile,
malleable precious metal that does not tarnish at normal temperatures. Wide
applications range from electronics, dentistry, jewellery and automotive
catalytic converters.  PGMs means Platinum Group Metals. Platinum Group Metals include
platinum, palladium, rhodium, ruthenium, osmium and iridium. All PGMs have
catalytic qualities and resist corrosion and are chemically inert over a wide
range of temperatures.  probable mineral reserve means the
economically mineable part of an indicated, and in some circumstances a
measured mineral resource demonstrated by at least a preliminary feasibility
study. This study must include adequate information on mining, processing,
metallurgical, economic, and other relevant factors that demonstrate, at the
time of reporting, that economic extraction can be justified.  professional association, for the purposes
of the definition of a qualified person below, means a self-regulatory
organization of engineers, geoscientists or both engineers and geoscientists
that  (a)has been given
authority or recognition by statute;  (b)admits members
primarily on the basis of their academic qualifications and experience;  (c)requires compliance
with the professional standards of competence and ethics established by the
organization; and  (d)has disciplinary
powers, including the power to suspend or expel a member.  pyroxenite
means an ultramafic rock which predominantly contains the mafic mineral
pyroxene (Mg-rich silicate).  63


qualified person means an individual who  (a)is an engineer or
geoscientist with at least five years of experience in mineral exploration,
mine development or operation or mineral project assessment, or any combination
of these;  (b)has experience
relevant to the subject matter of the mineral project and the technical report;
and  (c)is a member in good
standing of a professional association.  rhodium means a silver-white metal of the
platinum family resistant to tarnishing and used as an electrode posit, or
alloyed with platinum to manufacture thermocouples.  SAG mill means a semi-autogenous grinding
mill. A SAG mill is one in which steel balls are added to the mill charge to
supplement the grinding capabilities of the larger pieces of ore.  strip ratio means the ratio of units of
waste material required to be removed to facilitate the mining of one unit of
economic material.  tailings impoundment means a containment area constructed
to hold tailings.  tailings means that portion of the ore
which remains after the valuable minerals have been extracted. tailings
impoundment means a containment area constructed to hold tailings.  ton means a short ton, equivalent to 2,000
pounds.  tonne means a metric measure consisting of
2,204.6 pounds or 1,000 kilograms.  ultramafic means rocks composed of greater
than 90% mafic minerals. (PGM deposits are usually hosted in mafic and
ultramafic intrusive rocks.)  UTM means the Universal Transverse Mercator coordinate
system, a grad coordinate system.  waste means barren rock in a mine, or
mineralized material that is too low in grade to be mined and milled at a
profit.  64