**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      40-F**





**o REGISTRATION
      STATEMENT PURSUANT TO SECTION 12 OF THE**


**SECURITIES
      EXCHANGE ACT OF 1934**





**x ANNUAL
      REPORT
      PURSUANT TO SECTION 13(a) OR 15(d) OF THE**


**SECURITIES
      EXCHANGE ACT OF 1934**




For the fiscal year ended December 31,
              2006
            Commission
                File Number
                1-15142







**North
      American Palladium Ltd.**


*(Exact
      name of Registrant as specified in its charter)*





**Canada**
            
            **1099**
            
            **Not
                Applicable***(Province
                or other Jurisdiction ofIncorporation or
                Organization)*
            
            *(Primary
                Standard Industrial**Classification Code
                Number)*
            
            *(I.R.S.
                EmployerIdentification
                No.)*





**130
      Adelaide Street West**


**Suite
      2116, Toronto, Ontario**


**M5H
      3P5**


**(416)
      360-7590**


*(Address
      and telephone number of Registrants' principal executive
      offices)*





**CT
      Corporation System**


**111
      Eighth Avenue**


**New
      York, NY 10011**


**(212)
      894-8940**


*(Name,
      address (including zip code) and telephone number*


*(including
      area code) of agent for service in the United States)*








Securities
      registered or to be registered pursuant to Section 12(b) of the
      Act.





**Title
                Of Each Class**
            
            **Name
                of each Exchange**
              **On
                Which Registered:****Common
                Shares, No Par Value**
            
            **American
                Stock Exchange**





Securities
      registered or to be registered pursuant to Section 12(g) of the
      Act.





**None**





Securities
      for which there is a reporting obligation pursuant to Section 15(d) of the
      Act.





**None**





For
      annual reports, indicate by check mark the information filed with this
      Form:





x Annual
      information
      form x Audited
      annual financial statements





Indicate
      the number of outstanding shares of each of the issuer's classes of capital
      or
      common stock as of the close of the period covered by this annual
      report.





**The
      Registrant had 52,947,693 Common Shares**


**outstanding
      as at December 31, 2006**





Indicate
      by check mark whether the Registrant by filing the information contained in
      this
      Form is also thereby furnishing the information to the Commission pursuant
      to
      Rule 12g3-2(b) under the Securities Exchange Act of 1934 (the "Exchange Act").
      If "Yes" is marked, indicate the filing number assigned to the registrant in
      connection with such Rule.




Yes
**o**82-______
            Nox








Indicate
      by check mark whether the Registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months
      (or for such shorter period that the Registrant was required to file such
      reports) and (2) has been subject to such filing requirements for the past
      90
      days.





Yesx
            No**o**











**DOCUMENTS
      FILED UNDER COVER OF THIS FORM**





Document
              No. 1:
            Annual
                Information Form for the fiscal year ended December 31, 2006, dated
                March
                30,
                2007.  Document No. 2:
            Audited Comparative Consolidated Financial
              Statements for the fiscal year ended December 31, 2006, prepared in
              accordance with Canadian generally accepted accounting principles and
              the
              notes thereto.  Document No. 3:
            Supplementary schedule of “Reconciliation to
              Accounting Principles Generally Accepted in the United States” in
              accordance with Item 18 of Form-20F.  Document No. 4:
            Management's Discussion and Analysis
              of
              Operations and Financial Position for the fiscal year ended December
              31,
              2006.








**Document
      No. 1**













**NORTH
        AMERICAN PALLADIUM LTD.**
  **ANNUAL
        INFORMATION FORM**
  FOR
        THE
        YEAR ENDED DECEMBER 31, 2006
  DATED
        MARCH 30, 2007
  
  **TABLE
          OF CONTENTS**
  **Page**SPECIAL
                  NOTE REGARDING FORWARD-LOOKING STATEMENTS
              
              1METRIC
                  CONVERSION TABLE
              
              2OTHER
                  INFORMATION
              
              2CORPORATE
                  STRUCTURE
              
              3GENERAL
                  DEVELOPMENT OF THE BUSINESS AND DESCRIPTION OF THE
                  BUSINESS
              
              3Overview
              
              3Lac
                  des Iles Mine
              
              4Open
                  Pit Mining Operations
              
              4Underground
                  Mining Operations
              
              5Milling
                  Operations
              
              6Facilities
                  and Infrastructure
              
              7Metal
                  Sales
              
              7Royalty
                  Agreement
              
              7Smelting
                  and Refining Agreement
              
              7Financing
              
              8Platinum
                  and Palladium Purchase Agreement
              
              11Collective
                  Agreement with Hourly Workers
              
              11Mineral
                  Properties
              
              11Lac
                  Des Iles
              
              11Environmental
                  Matters
              
              17Haines-Conacher
                  Properties
              
              18Shakespeare
                  Property
              
              19Arctic
                  Platinum Project
              
              19DIVIDENDS
              
              20CAPITAL
                  STRUCTURE
              
              20MARKET
                  FOR SECURITIES
              
              21DIRECTORS
                  AND EXECUTIVE OFFICERS
              
              21Cease
                  Trade Orders, Bankruptcies, Penalties or Sanctions
              
              23Conflicts
                  of Interest
              
              23LEGAL
                  PROCEEDINGS
              
              23INTERESTS
                  OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
              
              24TRANSFER
                  AGENT
              
              24MATERIAL
                  CONTRACTS
              
              24INTERESTS
                  OF EXPERTS
              
              25RISK
                  FACTORS
              
              25AUDIT
                  COMMITTEE INFORMATION
              
              31Audit
                  Committee Charter
              
              31Composition
                  of the Audit Committee
              
              31Relevant
                  Education and Experience
              
              31Reliance
                  on Certain Exemptions
              
              32Audit
                  Committee Pre-Approval Policies and Procedures
              
              32External
                  Auditor Service Fees
              
              32ADDITIONAL
                  INFORMATION
              
              32AUDIT
                  COMMITTEE CHARTER
              
              33GLOSSARY
                  OF TERMS
              
              37
  
  **SPECIAL
        NOTE REGARDING FORWARD-LOOKING STATEMENTS**
  This
        annual information form (“AIF”) contains forward-looking statements within the
        meaning of the *U.S.
        Private Securities Litigation Reform Act of 1995* and the
        securities legislation of certain of the provinces of Canada. Forward-looking
        statements are necessarily based on estimates and assumptions made by the
        Corporation 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 and competitive
        uncertainties, 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 Corporation, or on its
        behalf.
  In
        making
        the forward-looking statements in this AIF, the Corporation has applied numerous
        material factors and assumptions, including, but not limited to:
  ·
              the
                  assumption that the operation of, and production and processing
                  from, the
                  underground mine in conjunction with the open pit mine will remain
                  viable
                  operationally and economically;
  ·
              financing
                  is available on reasonable terms;
  ·
              the
                  assumption that the advice the Corporation has received from its
                  consultants and advisors relating to matters such as mineral reserves
                  and
                  mineral resources, environmental requirements and certain legal
                  proceedings is reliable and correct and, in particular, that the
                  models,
                  dilution strategies and mining recovery estimates used to calculate
                  mineral reserves and mineral resources are appropriate and
                  accurate;
  ·
              the
                  assumption that the Corporation will be able to negotiate the renewal
                  of/or enter into a new smelting and refining agreement(s)
                  and
  ·
              the
                  assumption that the Corporation’s plans for sustainable recoveries from
                  the Lac des Iles Mine, for further exploration at the Lac des Iles
                  Mine
                  and surrounding region and for exploration in Finland can proceed
                  as
                  expected.
  The
        words
“expect,” “anticipate,” “estimate,” “may,” “will,” “should,” “intend,”
“believe,” “target,” “budget,” “plan,” “projection”, “strategy” and similar
        expressions are intended to identify forward-looking statements in this AIF.
        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,
        the
        inclusion or incorporation by reference of forward-looking statements in
        this
        AIF should not be considered as a representation by the Corporation or any
        other
        person that its objectives or plans will be achieved. Numerous factors could
        cause the Corporation’s actual results to differ materially from those in the
        forward-looking statements, including the following, which are discussed
        in
        greater detail under the “Risk Factors” section herein:
 ·
              inability
                  to meet production volumes or operating cost
                  goals;  ·
              inaccurate
                  resource and reserve estimates;  ·
              inherent
                  risks associated with mining and processing
                  operations;  ·
              failure to maintain production levels for underground
                mining operations;
 1
 ·
              failure
                  of the exploration program to increase
                  reserves;  ·
              competition
                  from other mining companies;  ·
              interruption
                  of operations at the Lac des Iles Mine;  ·
              termination
                  or failure to renew smelting
                  agreement(s);  ·
              volatility
                  in metal prices;  ·
              changes
                  in the United States/Canadian dollar exchange
                  rate;  ·
              failure
                  to renew the collective agreement on acceptable terms when it
                  expires;  ·
              costs
                  of complying with current and future environmental
                  regulation;  ·
              costs
                  of complying with other current and future governmental
                  regulation;  ·
              competition
                  from other suppliers of platinum group
                  metals;  ·
              development
                  of new technology leading to reduced demand for
                  palladium;  ·
              loss
                  of key personnel;  ·
              defaults
                  under credit facilities; and  ·
              hedging
                  activities.
  These
        factors should be considered carefully, and readers should not place undue
        reliance on the Corporation’s forward-looking statements. The Corporation
        undertakes no obligation to release publicly the results of any future revisions
        it may make to forward-looking statements to reflect events or circumstances
        after the date of this AIF or to reflect the occurrence of unanticipated
        events,
        except as required by law.
  **METRIC
        CONVERSION TABLE**
  **Imperial**
              
              **Metric**1
                  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
 
 **OTHER
        INFORMATION**
  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 (“Canadian GAAP”), which may differ from United States generally
        accepted accounting principles (“U.S. GAAP”).
  Descriptions
        of mineral reserve and mineral resource estimates included herein under Canadian
        standards may not be comparable to similar information made public by U.S.
        companies subject to reporting and disclosure requirements of the United
        States
        Securities and Exchange Commission. See “Mineral Reserve and Resource Estimates
        - Note to U.S. Shareholders” herein.
  The
        information is this AIF is presented as at March 20, 2007 unless otherwise
        indicated.
  2
  **CORPORATE
        STRUCTURE**
  North
        American Palladium Ltd. (the “Corporation”) is the successor to Madeleine Mines
        Ltd., a company incorporated under the *Québec
        Mining Companies Act* by
        letters patent dated February 2, 1968. In January 1992: (i) Madeleine Mines
        Ltd.
        was amalgamated with a wholly owned Québec subsidiary of 2750538 Canada Inc., a
        company incorporated under the *Canada
        Business Corporations Act* by
        articles of incorporation dated September 12, 1991; (ii) the amalgamated
        company
        was wound up into 2750538 Canada Inc.; and (iii) 2750538 Canada Inc. changed
        its
        name to “Madeleine Mines Ltd.” By articles of amendment dated July 24, 1993,
        Madeleine Mines Ltd. changed its name to “North American Palladium Ltd.” The
        Corporation has one operating subsidiary, Lac des Iles Mines Ltd. (“LDI”),
        incorporated under the *Canada
        Business Corporations Act* ,
        and
        wholly owned by the Corporation. Unless otherwise indicated, all references
        in
        this AIF to the “Corporation” include North American Palladium Ltd., together
        with its wholly-owned subsidiary, Lac des Iles Mines Ltd. The Corporation
        has
        two additional subsidiaries, North American Palladium Finland Oy and North
        American Palladium Arctic Services Oy, both Finnish corporations which are
        wholly-owned (see “Arctic Platinum Project”).
  The
        Corporation’s registered office is at Suite 2116, 130 Adelaide Street West,
        Toronto, Ontario M5H 3P5, telephone: (416) 360-7590, fax: (416) 360-7709.
        The
        Corporation’s mining operations are situated approximately 85 kilometres
        northwest of Thunder Bay at Lac des Iles, in northern Ontario. The postal
        address is P.O. Box 10547, Thunder Bay, Ontario P7B 6T9, telephone: (807)
        448-2000, fax: (807) 448-2001.
  **GENERAL
        DEVELOPMENT OF THE BUSINESS**
 **AND
        DESCRIPTION OF THE BUSINESS**
  The
        following description of the Corporation’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” included in this
        AIF.
  **Overview**
  The
        following contains forward-looking statements about the Corporation’s business.
        Reference should be made to “Special Note Regarding Forward-Looking Statements”
on page 1 and for a description of material factors that could cause the
        Corporation’s actual results to differ materially from the forward-looking
        statements in the following, please see “Risk Factors” commencing at page
        25 .
  The
        Corporation owns and operates an open pit and underground mine known as the
        Lac
        des Iles Mine and a processing plant with a design capacity of 15,000 tonnes
        per
        day. The mining and processing operation produces by flotation a palladium
        rich
        concentrate that also contains platinum, gold, copper and nickel. The
        concentrate is delivered to the Sudbury smelter operations of Xstrata Limited
        (formerly Falconbridge Limited) (“Xstrata”) and then further processed at its
        refining operations in Kristiansand, Norway.
  In
        late
        2003 the Corporation commissioned a feasibility study in response to scoping
        studies and a pre-feasibility study that indicated a higher grade sub-vertical
        ore body located directly beneath the open pit was viable as an underground
        mine. The feasibility study confirmed that an underground operation was
        economically viable operating concurrently with the open pit to provide a
        blended higher grade mill feed.
  The
        development of the underground mine commenced in the second quarter of 2004.
        Maintaining access to the original mine portal for the underground mining
        operations was difficult during 2005, as a result of pit blasts that obstructed
        the open pit ramp and ultimately limited underground access. The access problem
        was resolved by extending the main underground ramp to provide continuous
        access
        to the underground operation that was above the active open pit areas. Capital
        costs for the underground development were $36 million for direct and indirect
        costs (on budget). Mining equipment accounted for an additional $10 million
        of
        capital costs and the Corporation is financing this equipment through a vendor
        lease program. The Corporation began full production from the underground
        operations on April 1, 2006 and effective this date the production from the
        underground operations has been reflected in the operating results of the
        Corporation. The underground production for the nine months ended December
        31,
        2006 averaged 2,245 tonnes per day with an average palladium grade of 5.96
        grams
        per tonne. During the fourth quarter of 2006, underground production was
        2,418
        tonnes per day, with an average palladium grade of 6.42 grams per tonne.
  3
  **Lac
        des Iles Mine**
  The
        Lac
        des Iles property consists of four mining leases from the Government of Ontario
        numbered 104108 to 104111, inclusive, comprising 85 single unit mining claims
        and covering an aggregate of 1,469.57 hectares. The mining leases are dated
        September 1, 2006 and expire on August 31, 2027. In addition to the mining
        leases, the Corporation holds mining claims covering approximately 15,058.1
        hectares within a 425 kilometre radius of the Lac des Iles Mine.
  The
        Lac
        des Iles Mine and surrounding property are located approximately 85 kilometres
        northwest of the City of Thunder Bay, Ontario. Paved road access is provided
        by
        Ontario Provincial Highway 527, followed by 15 kilometres of an all weather
        gravel road, maintained by the Corporation. Approximately 90% of the employees
        reside in the Thunder Bay area.
  **Open
        Pit Mining Operations**
  The
        following table sets forth information concerning the production from the
        Lac
        des Iles Mine open pit operation for each of the five years ended December
        31,
        2006:
  **2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002**Ore
                  mined (tonnes)
              
              
              3,926,911
              
              
              3,705,555
              
              
              4,574,134
              
              
              4,396,847
              
              
              7,250,963Waste
                  mined (tonnes)
              
              
              8,888,037
              
              
              11,619,658
              
              
              12,275,889
              
              
              10,164,806
              
              
              9,828,552Total
                  mined (tonnes)
              
              
              12,814,948
              
              
              15,325,213
              
              
              16,850,023
              
              
              14,561,653
              
              
              17,079,515Stripping
                  ratio
              
              
              2.26:1
              
              
              3.14:1
              
              
              2.68:1
              
              
              2.31:1
              
              
              1.36:1Average
                  daily production(tonnes)
              
              
              35,109
              
              
              41,987
              
              
              46,038
              
              
              39,895
              
              
              46,793
  The
        Corporation mines ore and waste from the open pit using conventional hydraulic
        25 cubic metre and 19 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.
  In
        2006,
        total tonnes mined from the open pit amounted to 12.8 million tonnes or
        approximately 35,000 tonnes per day of combined ore and waste compared to
        15.3
        million tonnes or 42,000 tonnes per day in 2005. Ore production for 2006
        totalled 3.9 million tonnes grading 1.63 grams per tonne of palladium compared
        to 3.7 million tonnes grading 1.72 grams of palladium per tonne in
        2005.
  During
        2006 the waste to ore strip ratio decreased to 2.26:1 compared to 3:14 in
        2005.
        The waste to ore strip was higher in 2005 because of the development of the
        Phase 4 pit.
  4
  At
        the
        end of 2006, the broken ore stockpile consisted of 609,998 tonnes grading
        1.81
        grams of palladium per tonne containing approximately 35,000 ounces of palladium
        compared to 714,589 tonnes grading 1.78 grams of palladium per tonne containing
        approximately 41,000 ounces of palladium at the end of 2005.
  During
        the first quarter of 2006, the ultimate pit design implemented in 2004 was
        changed to an interim pit design that addressed previously disclosed south
        pit
        wall instability issues. The Corporation engaged an independent geotechnical
        consultant to review the slope stability issues and his recommendations were
        used by P&E Mining Consultants in designing a reconfigured open pit. The
        Corporation then commenced a detailed review of its life-of-mine operating
        plan
        for the Lac des Iles Mine. As a result of the review a revised mine plan
        has
        been adopted and the carrying value of the Corporation’s mining interests have
        been reviewed based upon this revised mine plan. The Corporation’s management
        believes, as at December 31, 2006, an impairment charge and a corresponding
        reduction in the carrying value of its mining interests is not
        required.
  **Underground
        Mining Operations**
  The
        underground portion of the Roby deposit is a continuation to depth of the
        Roby
        High Grade Zone that forms the core of the Roby open pit reserves. The
        underground deposit lies below the ultimate pit bottom of the Roby open pit
        at
        an elevation of 209 metres above sea level, and extends to a depth of 170
        metres
        below sea level, for a total dip length of 444 metres.
  Full
        production in the underground mine commenced April 1, 2006 and in the nine
        months ended December 31, 2006, the underground mine produced at the average
        rate of 2,245 tonnes of ore per day at an average head grade of 5.96 grams
        of
        palladium per tonne.
  Mobile
        equipment for the underground mine, for the Corporation and its contractors
        includes three electric hydraulic jumbo drills, two longhole drills, two
        6 cubic
        metre scooptrams, two 8.4 cubic metre scooptrams, three 60 tonne trucks and
        two
        40 tonne trucks, along with other service and support equipment.
  The
        chosen mining method is sublevel retreat longitudinal longhole stoping with
        no
        fill. The mining block interval is 70 metres floor to floor including a 15
        metre
        to 25 metre sill pillar below each haulage level. Stopes are 45 metres to
        55
        metres high by the width of the orebody. Total intake ventilation for the
        mine
        is designed to be 205 cubic metres per second. There is one intake ventilation
        raise/secondary egress situated outside the ultimate open pit limits and
        air
        exhausts up the main ramp.
  Work
        is
        currently being conducted using the Corporation’s workforce and contractors. The
        Corporation is endeavouring to replace contractors with its own employees;
        however, there is significant competition for skilled underground miners.
        The
        Corporation will continue to use contractors for production mining as it
        seeks
        to attract underground miners to the operation. Blasthole drilling and
        underground development work will continue to be conducted by
        contractors.
  5
  **Milling
        Operations**
  The
        concentrator produces a palladium rich concentrate that is shipped off-site
        for
        final processing. See “Smelting and Refining Agreements”. The following table
        set forth the tonnes milled and the metal production of the concentrate for
        each
        of the five years ended December 31, 2006:
  **Year**
              
              **Milled**
              
              **Concentrate**
              
              **Palladium**
              
              **Platinum**
              
              **Gold**
              
              **Copper**
              
              **Nickel**(tonnes)
              
              (tonnes)
              
              (troy
                  ozs)
              
              (troy
                  ozs)
              
              (troy
                  ozs)
              
              (lbs)
              
              (lbs)2006
              
              
              4,570,926
              
              
              29,483
              
              
              237,338
              
              
              22,308
              
              
              17,237
              
              
              5,155,588
              
              
              2,721,0422005
              
              
              4,780,599
              
              
              30,698
              
              
              177,167
              
              
              18,833
              
              
              14,308
              
              
              5,514,670
              
              
              2,353,2272004
              
              
              5,298,544
              
              
              45,652
              
              
              308,931
              
              
              25,128
              
              
              25,679
              
              
              7,836,183
              
              
              4,320,9702003
              
              
              5,159,730
              
              
              36,869
              
              
              288,703
              
              
              23,742
              
              
              23,536
              
              
              7,142,674
              
              
              4,070,7852002
              
              
              4,851,621
              
              
              27,179
              
              
              219,325
              
              
              19,180
              
              
              16,030
              
              
              5,295,486
              
              
              2,763,654
  The
        concentrator facility used at the mine has a design capacity of 15,000 tonnes
        per day. Ore is crushed in a gyratory crusher and conveyed to a coarse ore
        stockpile. With the commissioning of the secondary crusher in 2004, all of
        the
        coarse ore was crushed in the secondary crusher and the finer material was
        fed
        to the SAG mill. In 2005, modifications were made to the secondary crusher,
        including the installation of a grizzly to enable the operators to control
        the
        amount of coarse ore processed by the secondary crusher. 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 feeds a flotation circuit that is comprised
        of
        rougher/scavengers, four stages of cleaning and includes a regrind circuit.
        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. Tailings
        are
        contained in the existing tailings impoundment facility which is required
        to be
        expanded on an annual basis, throughout the life of the mine.
  The
        concentrator processed 4,570,926 tonnes of ore or 12,523 tonnes per calendar
        day
        in 2006 at an average palladium head grade of 2.18 grams per tonne and an
        average palladium recovery of 74.0%. The concentrator throughput was 4,780,599
        tonnes of ore in 2005 at an average palladium grade of 1.66 grams per tonne
        and
        an average palladium recovery of 69.6%. The Corporation produced 237,338,
        177,167 and 308,931 ounces of palladium in 2006, 2005 and 2004, respectively.
        Palladium production increased in 2006 primarily as a result of improved
        head
        grade due to the production from the underground mine. Recoveries were affected
        primarily by higher head grade, as well as the ongoing process of improving
        the
        throughput and availability of the mill by addressing and systematically
        resolving previously identified issues. These included flotation circuit
        improvements, implementation of proactive preventative maintenance programs,
        changes made to the mill flow sheet, reagent mix and the quality of recycled
        water.
  Production
        costs per tonne of ore milled were $24.60 in 2006, $20.78 in 2005 and $19.43
        in
        2004. Cash costs, which include direct and indirect operating costs, smelting,
        refining, transportation and sales costs, royalties, net of credits for
        by-products, were US$201 per ounce of palladium in 2006, US$359 per ounce
        of
        palladium in 2005 and US$159 per ounce of palladium in 2004. The decrease
        in the
        unit cash costs was caused by a combination of improved head grades and metal
        recoveries, which led to a 34% increase in palladium production to 237,338
        ounces in 2006 compared to 177,167 ounces in 2005, combined with the 70%
        increase in revenue from by-product metals. In addition, throughout the year
        there was a decrease in the open pit waste to ore strip ratio to 2.26:1 in
        2006,
        compared to 3.14:1 in 2005. However, there continues to be pressure on costs,
        particularly steel, tires, power and diesel fuel.
  6
  **Facilities
        and Infrastructure**
  In
        addition to the concentrator, the mining operation includes an assay laboratory,
        a warehouse, 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 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 (“TMF”) has been operating since 1990.
        Until 1998, the dams were primarily constructed as water retaining dams,
        comprising rock fill, filters and glacial till or high density polyethylene
        facing. In 1998 and 1999, dams at the north end of the facility were raised
        using rock fill and tailings. Further TMF expansion commenced in 2000 and
        was
        designed to accommodate successive lifts when required to store the tailings
        produced over the mine life. The dams have been raised and are constructed
        of
        non-reactive waste rock two inch minus crushed rock and geotextile. The TMF
        is
        an industrial waste impoundment, where erosion is minimized, runoff is managed,
        water is returned to the concentrator as needed and excess water is stored
        until
        it can be treated and released. The design of the operation provides for
        closure
        and reclamation of the facility.
  **Metal
        Sales**
  During
        2006 all palladium production was sold into the spot market with one or more
        commodity dealers and manufacturers.
  On
        January 19, 2007, LDI entered into a platinum and palladium purchase agreement
        with Auramet Trading LLC. See “Financing - Platinum and Palladium Purchase
        Agreement”.
  The
        Corporation enters into forward commodity sales contracts on its by-product
        metal production from time to time to hedge the effect of changes in certain
        metal prices on the Corporation’s revenues. During 2006, however, the
        Corporation chose to sell all of its by-product metal production into the
        spot
        market.
  **Royalty
        Agreement**
  Production
        from the Lac des Iles Mine is subject to a royalty agreement with The Sheridan
        Platinum Group Inc. and John Patrick Sheridan (together referred to as the
        “Sheridan Group”). Under the agreement, the Corporation is obligated to pay to
        the Sheridan Group a royalty equal to 5% of “net cash proceeds” received from
        concentrates and other products produced at the Lac des Iles Mine. The term
“net
        cash proceeds” is defined in the royalty agreement generally as the net proceeds
        of sale receivable by LDI from the production and sale of concentrates from
        the
        Lac des Iles Mine, after deducting the costs of sampling, assaying, transporting
        and insuring the concentrate; smelter, processing and refining charges and
        penalties (excluding LDI’s own processing costs) and all applicable taxes and
        royalties that must be paid in respect of the mining operations. Under the
        royalty agreement, the Sheridan Group may elect, and has elected, to receive
        payment of the royalty, in respect of palladium and platinum, in kind rather
        than in cash and, in respect of other metals, the Sheridan Group has elected
        to
        receive cash. All mining operations at the Lac des Iles Mine are located
        on the
        mining leases and are covered by the royalty agreement.
  **Smelting
        and Refining Agreement**
  The
        Corporation has a smelting and refining agreement with Xstrata pursuant to
        which
        Xstrata purchases the Corporation’s concentrates and settles in cash or, at the
        Corporation’s option, makes available to the Corporation the refined palladium,
        platinum and gold at Xstrata’s refining facilities in Kristiansand, Norway. The
        agreement expires on April 30, 2007 and a renewal is currently being negotiated.
        However, in certain circumstances, such as default of performance, insolvency
        or
        ceasing to carry on business, the agreement can be terminated by the party
        not
        in default, insolvent or ceasing to carry on business. The agreement can
        be
        suspended in the event of a force majeure.
  7
  The
        Corporation had an agreement with Inco Limited (now CVRD Inco Limited) (“Inco”),
        which expired on November 30, 2005. Under the terms of the agreement, Inco
        purchased the Corporation’s concentrates and settled in cash or, at the
        Corporation’s option, made available to the Corporation the refined palladium
        and platinum at Inco’s Acton Refinery in London, England.
  **Financing**
  ***Senior
        Credit Facilities***
  On
        June
        28, 2004, the Corporation entered into a US$20 million and a $10 million
        senior
        credit facility (the “Senior Credit Facilities”) with a leading equipment
        finance company. These facilities are fully drawn. The US$20 million credit
        facility is repayable in equal quarterly instalments of US$1 million which
        commenced on September 30, 2004 and has a final maturity on June 30, 2009.
        The
        $10 million credit facility is repayable in equal quarterly instalments of
        $500,000 which commenced on February 24, 2005 and has a 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 lender has a first priority security in
        all
        of the Corporation’s existing and future assets excluding its production leases
        and claims. The Senior Credit Facilities allow, in certain circumstances,
        full
        repayment of outstanding amounts drawn at any time during their respective
        terms.
  ***Kaiser-Francis
        Credit Facilities***
  In
        December 2001, Kaiser-Francis Oil Company (“Kaiser-Francis”) provided a US$20
        million non-revolving credit facility to finance the Corporation’s working
        capital requirements. In the second quarter of 2004, the Kaiser-Francis credit
        facility was extended to **** June
        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 Corporation granted Kaiser-Francis a security
        interest in the assets of the Corporation, 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 convertible note issued on that date (see
“Convertible Note Financing” below).
  On
        October 12, 2006, the Corporation obtained from Kaiser-Francis a $US5 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 Corporation 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 Corporation
        granted to Kaiser-Francis a first priority security interest in the inventory
        and receivables of the Corporation. On December 13, 2006 the maturity date
        was
        extended to March 31, 2007, with no other changes in terms. The Corporation
        paid
        a commitment fee of US$25,000 for the extension. As at December 31, 2006,
        the
        outstanding loan was $US5 million. The loan was repaid on March 7, 2007 (see
        “Platinum and Palladium Purchase Agreement” below).
  The
        amount payable to Kaiser-Francis for interest, standby fees and guarantee
        fees
        on these facilities was $551,000 in 2006 compared to $836,000 in 2005. As
        at
        December 31, 2006, US$5 million was drawn on the facilities. Kaiser-Francis
        holds approximately 50% of the outstanding Common Shares of the
        Corporation.
  8
 
 ***Convertible
        Note Financing***
  On
        March
        28, 2006, the Corporation announced the execution of a securities purchase
        agreement dated March 24, 2006 (the “Securities Purchase Agreement”) relating to
        the private placement of up to US$58.5 million principal amount of convertible
        notes (the “Convertible Notes”) together with common share purchase warrants
        (the “Warrants”) exercisable to purchase, for four years from the date of their
        issuance, 50% of the number of Common Shares underlying the Convertible Notes.
        Under the terms of the Securities Purchase Agreement, on March 29, 2006 the
        Corporation issued a Series I Convertible Note in the principal amount of
        US$17.5 million to each of Kaiser-Francis and IP Synergy Finance Inc. (“IPSF”
and, collectively with Kaiser-Francis, the “Holders”). On June 23, 2006, the
        Corporation issued a Series II Convertible Note in the principal amount of
        US$13.5 million to Kaiser-Francis
  The
        Series I Convertible Notes were initially convertible into 2,873,563 Common
        Shares representing an effective price of US$12.18 per share (the “Initial
        Conversion Price”). The Series II Convertible Note was initially convertible, at
        the Initial Conversion Price, into 1,108,374 Common Shares. The Initial
        Conversion Price is equal to 113% of the Initial Market Price. For the purposes
        of the Convertible Notes, the Initial Market Price is US$10.78, being the
        five
        day weighted average trading price of the Common Shares on the American Stock
        Exchange (the “AMEX”) immediately preceding March 24, 2006. In addition,
        Warrants exercisable to purchase 1,436,782 Common Shares (the “Series I
        Warrants”) were issued with the Series I Convertible Notes, and common share
        purchase warrants exercisable to purchase 554,187 Common Shares (the "Series
        II
        Warrants") were issued with the Series II Convertible Note. Each Warrant
        is
        exercisable to purchase one Common Share at an initial exercise price (the
        “Initial Exercise Price”) of US$13.48. The Initial Exercise Price of the
        Warrants is equal to 125% of the Initial Market Price.
  The
        Series I Convertible Notes bear interest at a rate of 6.5% per annum, payable
        bi-monthly, commencing on June 1, 2006. The Series II Convertible Note bears
        interest at a rate of 6.5% per annum, payable bi-monthly, commencing on August
        1, 2006. The Series I Convertible Notes are to be repaid in nine equal
        instalments which will commence on April 1, 2007. The Series II
        Convertible Note is to be repaid in nine equal instalments which will commence
        on August 1, 2007. The interest payments and/or principal repayment amounts
        may
        be paid to each Holder, at such Holder’s option, in any combination of cash
        and/or Common Shares. Common Shares issued for interest payments or in repayment
        of the Convertible Notes will be issued at a 10% discount from the weighted
        average trading price of the Common Shares on the AMEX for the five consecutive
        trading days immediately prior to the applicable payment date. The Corporation
        has the right to defer any principal repayment in cash until a later principal
        repayment date. There is no limit on the length of the deferral, other than
        it
        cannot be deferred later than the final maturity date. The Company must give
        five days notice of its intention to defer payment.
  Commencing
        June 29, 2007, in respect of the Series I Convertible Notes, and September
        23,
        2007, in respect of the Series II Convertible Note, if the weighted average
        trading price of the Common Shares on the AMEX for each of any twenty-five
        consecutive trading days is at least 150% of the Initial Conversion Price,
        the
        Corporation will, subject to certain conditions, have the right to force
        the
        Holders to convert all or any of the outstanding principal amount of the
        Series
        I Convertible Notes or the Series II Convertible Note, respectively, at the
        then
        conversion price.
  The
        Convertible Notes contain customary covenants, including restrictions on
        the
        Corporation incurring debt, payment of dividends or obligations for or
        involving the payment of money in excess of certain restricted amounts. The
        Convertible Notes also contain customary anti-dilution protection (including
        full protection for dividends) as well as adjustments in the event that the
        Corporation issues Common Shares or securities convertible into Common Shares
        at
        a purchase price (the “Effective Price”) per Common Share less than the
        Conversion Price. In such event, the conversion price will be reduced to
        the
        Effective Price, provided that the adjusted conversion price cannot be less
        than
        US$9.12 (adjusted as prescribed in the Convertible Notes). As a result of
        subsequent issues of Common Shares at Effective Prices less than the Initial
        Conversion Price, the conversion price of the Convertible Notes has been
        reduced
        to US$9.45.
  9
  The
        Warrants contain anti-dilution protection similar to that of the Convertible
        Notes. In the event that the Corporation issues Common Shares or securities
        convertible into Common Shares at an Effective Price per Common Share less
        than
        the exercise price of the Warrants, the exercise price of the Warrants will
        be
        reduced to the Effective Price provided that the adjusted exercise price
        cannot
        be less than US$10.73 (adjusted as prescribed in the Warrants). As a result
        of
        subsequent issues of Common Shares at an Effective Price less than the Initial
        Exercise Price, the exercise price of the Warrants has been reduced to
        US$10.73.
  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, with each
        Holder entitled to acquire one-half. If either Holder determined not to acquire
        its entire allotment of the Series III Convertible Notes, the other Holder
        was
        entitled to purchase the balance. Warrants were also to be issued in connection
        with the Series III Convertible Notes. The Holders elected not to exercise
        their
        option to acquire the Series III Convertible Notes.
  On
        June
        21, 2006, the shareholders of the Corporation approved the issuance of all
        of
        the Common Shares issuable to the Holders in connection with the Convertible
        Notes.
  If
        a
        Holder elects to receive interest payments or principal repayments on the
        Series
        I Convertible Notes or Series II Convertible Note in Common Shares and the
        Corporation is, for any reason, unable to issue such Common Shares, the interest
        payment or principal repayment will be made in cash. If a Holder is restricted
        in its ability to receive Common Shares upon conversion of the Series I
        Convertible Notes or Series II Convertible Note, the Holder may require the
        Corporation to pay cash to such Holder in an amount equal to the number of
        Common Shares which such Holder was not permitted to receive (the “Excess
        Shares”) multiplied by the average of the weighted average trading price of the
        Common Shares on the AMEX for each of the five trading days immediately prior
        to
        the date of the payment, upon which the Corporation will have no further
        obligation to issue such Excess Shares. If a Holder is restricted in its
        ability
        to receive Common Shares upon exercise of Series I or Series II Warrants,
        the
        Corporation will be required to pay cash to such Holder in an amount equal
        to
        the binomial option pricing model of the applicable Warrant with respect
        to the
        portion of such Warrant which is unexercisable.
  To
        date,
        the Holders have elected to receive all interest payable under the Convertible
        Notes in Common Shares. For the year ended December 31, 2006, the Corporation
        issued 242,159 Common Shares to the Holders in payment of interest due under
        the
        Convertible Notes. An additional 68,138 Common Shares were issued in payment
        of
        interest for the two month period ended February 1, 2007.
  ***Private
        Placement***
  On
        February 27, 2007 the Corporation completed a private placement of 550,000
        flow
        through common shares at $11.00 per share for gross proceeds of $6.05 million.
        The underwriter of the private placement was Dundee Securities Corporation
        which
        received a 6% commission. The gross proceeds will be used to expedite wok
        on the
        Shebandowan Project.
  10
  ***Platinum
        and Palladium Purchase Agreement***
  On
        February 5, 2007, the Corporation announced that LDI had entered into a platinum
        and palladium purchase agreement dated as of January 19, 2007 (the “Auramet
        Agreement”) with Auramet Trading, LLC (”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 Corporation is a guarantor of LDI’s
        obligations under the Auramet Agreement. LDI may not request any purchase
        and
        sale after June 15, 2008 and all sales and payment therefor are required
        to be
        settled by December 31, 2008. LDI may 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 may 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, the
        afternoon fixing of the London Bullion Marketing Association immediately
        preceding the purchase. In each case such pricing will reflect the forward
        value
        corresponding to the scheduled delivery date. Advance payments to LDI may
        not
        exceed specified values of fixed and provisionally priced platinum and
        palladium. Provisional prices must be fixed prior to the scheduled delivery
        date
        for such precious metals. Each advance payment will be subject to a discount
        equal to LIBOR plus 1.9% 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 will pay to LDI the difference between
        the
        advance payment and the purchase price.
  To
        secure
        the obligations of LDI under the Auramet Agreement, LDI has granted to Auramet
        a
        security interest, among other things, in the concentrates (including the
        precious and base metals contained therein) mined at the Lac des Iles Mine,
        together with the proceeds arising from the sale of the concentrate, and,
        by way
        of security, an assignment of its smelting and refining agreement with
        Xstrata.
  The
        first
        advance payment was made on March 7, 2007 and was used to repay a bridge
        loan
        from the Corporation’s major shareholder and subsequent advance payments will be
        used to finance working capital requirements.
  **Collective
        Agreement with Hourly Workers**
  Following
        mediation during 2006, the Corporation entered into a new collective agreement
        with United Steelworkers of America, Local 9422. The new collective agreement
        is
        for a three year term and expires on February 23, 2009.
  **Mineral
        Properties**
  **Lac
        Des Iles**
  ***Regional
        Geology***
  The
        Lac
        des Iles area is underlain by Archean-age rocks of the Superior Province
        of the
        Canadian Shield which are overlain and intruded by rocks of the Proterozoic-age
        Southern Province. The Superior Province can be subdivided into areas of
        plutonic, granite-greenstone, metasedimentary and gneissic rocks. The Southern
        Province consists of a blanket of sedimentary rocks extensively intruded
        by
        gabbroic magma.
  11
  In
        the
        Archean, mafic to ultramafic intrusions scattered throughout northwestern
        Ontario host, or have the potential to host, platinum group metal
        mineralization. Platinum group metal mineralization of Proterozoic age is
        also
        known to occur in northwestern Ontario.
  In
        the
        Lac des Iles area, the Lac des Iles Intrusive Complex is one of many platinum
        group metal-bearing, mafic to ultramafic, intrusions that define a circular
        feature (of speculative origin) with a diameter of 30 kilometres. The 30-square
        kilometre Lac des Iles Intrusive Complex consists of three separate magma
        chambers partially separated by tonalite septum. The ultramafic North Lac
        des
        Iles Intrusive Complex is centered on Lac des Iles. The gabbroic Mine Block
        Intrusion and Camp Lake Intrusion occur south of Lac des Iles. The Camp Lake
        Intrusion is a relatively homogeneous hornblende gabbro and contains minor
        base
        metal sulphides and platinum group metals. The Mine Block Intrusion to the
        north
        is complex in structure, texture and composition, and contains abundant platinum
        group metal mineralization. The most significant occurrences of platinum
        group
        metal (PGM) mineralization are in the Mine Block Intrusion and are the Roby,
        Twilight, Baker and Creek zones. The Roby and Twilight zones are the only
        defined areas of economic mineralization on the Lac des Iles
        property.
  ***Mine
        Block Intrusion Geology***
  The
        Roby
        zone is a breccia zone, currently measuring 950 metres long, 815 metres wide
        and
        1500 metres deep, and remains open at depth. Platinum group metal mineralization
        is associated with pyroxenite, gabbronorite and gabbro in areas that have
        been
        invaded and brecciated by copper-nickel-platinum group metal-bearing
        melanogabbro, which also generated abundant pegmatitic gabbro. The PGM
        mineralization typically contains from a trace to 5% pyrrhotite, chalcopyrite,
        pyrite and pentlandite. The platinum group metals include vysotskite,
        isomerticite, kotulskite, sperrylite, merenskyite and palladium arsenide.
        Similar breccia textured mineralization occurs at other locations within
        the
        intrusive complex.
  The
        Roby
        zone contains two distinct types of mineralization separated by a zone of
        sheared and mineralized pyroxenite that trends north-northwest. North of
        the
        shear zone, the North Roby ore is hosted by varitextured gabbro and gabbronorite
        that strikes northeast and dips to the east-southeast variably at 45 to 60
        degrees. This mineralization tends to be sulphide-poor. Southwest of the
        shear
        zone the breccia ore (the “Breccia Ore”) is hosted by a heterolithic gabbro
        breccia with abundant pegmatitic and varitextured gabbro. From the pyroxenite
        contact, the grades diminish gradually to the west. This zone of Breccia
        Ore
        typically contains 2% to 5% sulphides. The pyroxenite is well mineralized
        and
        contains high grade ore associated with intense alteration. The Main High
        Grade
        Zone occurs at the eastern boundary of the central portion of the Roby Zone
        and
        extends below the economic limits of the Roby pit. This near vertical planar
        zone has a strike length exceeding 350 metres with thickness averaging 12
        metres
        and is ideal for exploitation by underground mining methods. It is continuous
        to
        a depth of 675 metres where it is truncated and offset to the west by a fault.
        Below this fault, the faulted extension known as the Offset High Grade zone
        has
        been traced to a depth of 1,200 metres, over a strike length of 600 metres,
        and
        remains open down plunge and to a large degree down dip. As well, a second
        mineralized zone, known as the Footwall Roby Zone, has been located on the
        footwall side, and in immediate proximity to the Offset High Grade
        Zone.
  The
        Twilight zone lies 50 to 70 metres east of the east boundary of the Roby
        zone.
        The Baker zone is located one kilometre east of the Roby zone and the Creek
        Zone
        is located less than two kilometres from the Roby Zone.
  ***Exploration***
  In
        2006,
        exploration drilling on the Offset High Grade Zone totalled 5,662.5 metres
        in 8
        drill holes that were wedged from previously completed drill holes. The drilling
        was conducted by Bradley Brothers Limited and supervised by employees of
        the
        Corporation. The Offset High Grade Zone has now been intersected over a 700
        metre vertical height and approximately 600 metres along strike.
  12
  The
        results from the drilling program carried out in 2006 were announced in two
        press releases dated June 20, 2006 and September 14, 2006 and are summarized
        in
        tabular form below:
  **(metres)**
              
              **(grams
                  per tonne)**
              ****
              **%**
              ****
              **%****Hole
                  ID**
              
              **From**
              
              **To**
              
              **Interval**
              
              **Palladium**
              
              **Platinum**
              
              **Gold**
              
              **Nickel**
              
              **Copper**05-006W2
              
              
              1021.35
              
              
              1096.00
              
              
              74.65
              
              
              7.231
              
              
              0.465
              
              
              0.622
              
              
              0.145
              
              
              0.153incl
              
              
              1024.00
              
              
              1064.00
              
              
              40.00
              
              
              10.375
              
              
              0.648
              
              
              0.968
              
              
              0.210
              
              
              0.22305-006W3
              
              
              1043.70
              
              
              1069.00
              
              
              25.30
              
              
              7.606
              
              
              0.557
              
              
              0.645
              
              
              0.161
              
              
              0.123incl
              
              
              1053.00
              
              
              1066.00
              
              
              13.00
              
              
              10.244
              
              
              0.658
              
              
              0.724
              
              
              0.155
              
              
              0.10305-006W4
              
              
              1068.00
              
              
              1164.00
              
              
              96.00
              
              
              6.310
              
              
              0.429
              
              
              0.454
              
              
              0.162
              
              
              0.153incl
              
              
              1068.00
              
              
              1081.35
              
              
              13.35
              
              
              15.194
              
              
              0.754
              
              
              1.003
              
              
              0.153
              
              
              0.23005-006W5
              
              
              1050.00
              
              
              1070.00
              
              
              20.00
              
              
              6.610
              
              
              0.526
              
              
              0.394
              
              
              0.130
              
              
              0.144incl
              
              
              1114.00
              
              
              1127.00
              
              
              13.00
              
              
              7.369
              
              
              0.326
              
              
              0.264
              
              
              0.134
              
              
              0.09705-016W1
              
              
              986.60
              
              
              995.00
              
              
              8.40
              
              
              6.268
              
              
              0.518
              
              
              0.794
              
              
              0.230
              
              
              0.349and
              
              
              1012.75
              
              
              1060.00
              
              
              47.25
              
              
              5.083
              
              
              0.339
              
              
              0.400
              
              
              0.181
              
              
              0.217incl
              
              
              1024.00
              
              
              1038.20
              
              
              14.20
              
              
              8.600
              
              
              0.424
              
              
              0.250
              
              
              0.090
              
              
              0.159and
              
              
              1083.00
              
              
              1094.00
              
              
              11.00
              
              
              7.337
              
              
              0.384
              
              
              0.222
              
              
              0.055
              
              
              0.08105-016W2
              
              
              965.75
              
              
              975.15
              
              
              9.40
              
              
              9.560
              
              
              0.669
              
              
              0.769
              
              
              0.273
              
              
              0.269and
              
              
              982.00
              
              
              994.00
              
              
              12.00
              
              
              5.381
              
              
              0.373
              
              
              0.322
              
              
              0.090
              
              
              0.21705-016W3
              
              
              1021.00
              
              
              1071.00
              
              
              50.00
              
              
              6.446
              
              
              0.465
              
              
              0.360
              
              
              0.096
              
              
              0.077incl
              
              
              1021.00
              
              
              1048.00
              
              
              27.00
              
              
              8.198
              
              
              0.585
              
              
              0.387
              
              
              0.100
              
              
              0.072incl
              
              
              1021.00
              
              
              1033.00
              
              
              12.00
              
              
              10.197
              
              
              0.690
              
              
              0.338
              
              
              0.091
              
              
              0.06905-016W4
              
              
              1066.60
              
              
              1216.50
              
              
              149.90
              
              
              5.372
              
              
              0.384
              
              
              0.456
              
              
              0.175
              
              
              0.180incl
              
              
              1066.60
              
              
              1080.50
              
              
              13.90
              
              
              10.281
              
              
              0.741
              
              
              0.947
              
              
              0.300
              
              
              0.274and
              
              
              1127.00
              
              
              1151.00
              
              
              24.00
              
              
              7.306
              
              
              0.493
              
              
              0.753
              
              
              0.193
              
              
              0.216
  13
  Exploration
        for 2007 at Lac des Iles is expected to focus on completion of sufficient
        drilling so as to allow upgrading of the mineral resources contained in the
        upper portion of the Offset High Grade Zone and the Footwall Roby Zone into
        Measured and Indicated mineral resource categories The drilling program is
        expected to commence in the second quarter of 2007. The mineral resources
        will
        then be re-estimated using all available information. This work is expected
        to
        be completed in the fourth quarter of 2007.
  ***Mineral
        Reserve and Mineral Resource Estimates***
  The
        following contains forward-looking statements about the Corporation’s mineral
        reserve and mineral resource estimates. Reference should be made to “Special
        Note Regarding Forward-Looking Statements” on page 1 and for a description of
        material factors that could cause the Corporation’s actual results to differ
        materially from the forward-looking statements in the following, please see
        “Risk Factors” commencing at page .
  The
        mineral resource and mineral reserve estimates prepared by the Corporation
        conform to the definitions adopted by the Canadian Institute of Mining,
        Metallurgy and Petroleum (the “CIM”) Standards on Mineral Resources and Reserves
        - Definitions and Guidelines adopted by the CIM Council on August 20, 2000
        which
        classifies resources into measured, indicated and inferred confidence categories
        and classifies reserves as proven and probable. These mineral resource and
        mineral reserve estimates are disclosed in compliance with National Instrument
        43-101 Standards Of Disclosure For Mineral Projects (“National Instrument
        43-101”)..
  ***Note
        to U.S. Shareholders***
  The
        Corporation is required under Canadian law (National Instrument 43-101 of
        the
        Canadian securities administrators) to report mineral reserves and resources
        using the classification system set out in the CIM Standards for Mineral
        Resources and Mineral Reserves (as amended on December 11, 2005). These
        guidelines establish definitions for the reporting of mineral resources and
        mineral reserves in Canada. These definitions have not been adopted for use
        in
        the United States by the Securities and Exchange Commission (the
“SEC”).
  The
        CIM
        definitions of proven and probable reserves are substantially similar to
        the
        definitions of proven and probable reserves as set out Industry Guide No.
        7
        under the U.S. Securities Act of 1933, as amended. In addition, Canadian
        law
        requires disclosure of mineral resources if such resources are material to
        the
        company. While the terms “mineral resource”, “measured mineral resource”,
“indicated mineral resource” and “inferred mineral resource” are recognized by
        Canadian securities administrators, they are not defined terms under the
        standards in the United States. As such, the information contained in this
        AIF
        (and in particular the sections entitled “Mineral Reserves” and “Mineral
        Resources”) concerning descriptions of mineralization and resources under
        Canadian standards may not be comparable to similar information made public
        by
        U.S. companies subject to reporting and disclosure requirements of the SEC.
        “Measured mineral resources”, “Indicated mineral resources” and “inferred
        mineral resources” have variable amounts of uncertainty as to their existence
        and as to their economic and technical viability. It cannot be assumed that
        all
        or any part of an “indicated mineral resource” or “inferred mineral resource”
will ever be upgraded to a higher category. Investors are cautioned not to
        assume that all or any part of the mineralization classified in these categories
        will ever be reclassified as reserves.
  ***Mineral
        Reserves***
  Mineral
        reserves are presently defined on a palladium-only basis for the open pit
        and
        underground mines. The deposit is polymetallic by nature, with economically
        recoverable credits for platinum, gold, copper, nickel and cobalt. A significant
        portion of revenue is derived from palladium, averaging about 48% of revenues
        in
        2006.
  14
  The
        following table sets forth the estimated open pit reserves at the Lac des
        Iles
        Mine as at December 31, 2006:
  **Reserves**
              
              **Tonnes**
              
              **Palladium**
              
              **Platinum**
              
              **Gold**
              
              **Copper**
              
              **Nickel**
              
              **Palladium**
              
              **Platinum**(000)
              
              (g/t)
              
              (g/t)
              
              (g/t)
              
              (%)
              
              (%)
              
              (000
                  oz)
              
              (000
                  oz)Proven
              
              
              6,853
              
              
              2.353
              
              
              0.221
              
              
              0.188
              
              
              0.072
              
              
              0.085
              
              
              518
              
              
              49Proven
                  Stockpiles
              
              
              604
              
              
              1.772
              
              
              0.195
              
              
              0.156
              
              
              0.058
              
              
              0.076
              
              
              34
              
              
              4Probable
              
              
              2,616
              
              
              2.060
              
              
              0.215
              
              
              0.173
              
              
              0.075
              
              
              0.087
              
              
              173
              
              
              18Total
                  Proven and Probable
              
              
              10,073
              
              
              2.242
              
              
              0.218
              
              
              0.182
              
              
              0.072
              
              
              0.085
              
              
              725
              
              
              71
  The
        following table sets forth the estimated underground reserves at the Lac
        des
        Iles Mine as at December 31, 2006:
  **Reserves**
              
              **Tonnes**
              
              **Palladium**
              
              **Platinum**
              
              **Gold**
              
              **Copper**
              
              **Nickel**
              
              **Palladium**
              
              **Platinum**(000)
              
              (g/t)
              
              (g/t)
              
              (g/t)
              
              (%)
              
              (%)
              
              (000
                  oz)
              
              (000
                  oz)Proven
                  (Stockpile)
              
              
              5.68
              
              
              5.844
              
              
              0.380
              
              
              0.439
              
              
              0.103
              
              
              0.106
              
              
              1
              
              
              0.07Probable
              
              
              2,695
              
              
              6.580
              
              
              0.400
              
              
              0.330
              
              
              0.070
              
              
              0.080
              
              
              570
              
              
              35Total
                   Proven and Probable
              
              
              2,701
              
              
              6.578
              
              
              0.400
              
              
              0.330
              
              
              0.070
              
              
              0.080
              
              
              571
              
              
              36
  Notes:
 
 1.
        The
        Mineral Reserves for the underground mine were prepared under the supervision
        of
        Mr. David Penna, P. Geo and by Dr. Will Bawden, Ph. D., P. Eng. Mr. Penna
        holds
        the position of Senior Geologist at LDI while Dr. Bawden is independent of
        LDI
        and the Corporation.
  2.
        The
        dilution factors were taken from the Technical Report disclosing the results
        of
        the Feasibility Study for Underground Mining as prepared by Mssrs. Graham
        Clow
        and David Rennie of Roscoe Postle and Associates (2004), a copy of which
        is
        available on SEDAR.
  3.
        The
        mineral reserves are calculated at a cut-off grade of 4.5 grams of palladium
        per
        tonne for the underground mine, assuming an average long-term palladium price
        of
        US$325 per ounce and includes by-product metal credits.
  4.
        The
        palladium and platinum metal ounces are on a contained basis without adjustment
        for processing or smelting recoveries.
 
 See
“Note
        to U.S. Shareholders” above.
  15
  ***Mineral
        Resources***
  The
        following table sets forth the estimated open pit resources at the Lac des
        Iles
        Mine as at December 31, 2006:
  **Resources**
              
              **Tonnes**
              
              **Palladium**
              
              **Platinum**
              
              **Gold**
              
              **Copper**
              
              **Nickel**
              
              **Palladium**
              
              **Platinum**(000)
              
              (g/t)
              
              (g/t)
              
              (g/t)
              
              (%)
              
              (%)
              
              (000
                  oz)
              
              (000
                  oz)Measured
              
              
              8,259
              
              
              1.671
              
              
              0.222
              
              
              0.126
              
              
              0.062
              
              
              0.078
              
              
              444
              
              
              59Measured
                  (Stockpile)
              
              
              12,045
              
              
              0.963
              
              
              0.122
              
              
              0.081
              
              
              0.034
              
              
              0.055
              
              
              373
              
              
              47Indicated
              
              
              4,726
              
              
              1.608
              
              
              0.215
              
              
              0.113
              
              
              0.058
              
              
              0.076
              
              
              244
              
              
              33Total
                  Measured and Indicated
              
              
              25,030
              
              
              1.318
              
              
              0.173
              
              
              0.102
              
              
              0.048
              
              
              0.067
              
              
              1,061
              
              
              139Inferred
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
  1.
              The
                  Mineral Resources for the open pit mine were prepared under the
                  supervision of Mr. David Penna, P. Geo., who holds the position
                  of Senior
                  Geologist at LDI.
 2.
              The
                  mineral resources are calculated at a cut-off grade of 1.1 grams
                  of
                  palladium per tonne for the open pit, assuming an average long-term
                  palladium price of US$325 per ounce and includes by-product metal
                  credits.
 3.
              Mineral
                  resources are in addition to Mineral Reserves. Resources which
                  are not
                  reserves do not have demonstrated economic
                  viability.
 4.
              The
                  open pit reserves are reported as grade-diluted blocks but are
                  stated on
                  an in-situ basis.
 5.
              The
                  palladium and platinum metal ounces are on a contained basis without
                  adjustment for processing or smelting
                  recoveries.
  The
        following table sets forth the estimated underground resources for the Roby
        High
        Grade Zone at the Lac des Iles Mine as at December 31, 2006:
  **Resources**
              
              **Tonnes**
              
              **Palladium**
              
              **Platinum**
              
              **Gold**
              
              **Copper**
              
              **Nickel**
              
              **Palladium**
              
              **Platinum**(000)
              
              (g/t)
              
              (g/t)
              
              (g/t)
              
              (%)
              
              (%)
              
              (000
                  oz)
              
              (000
                  oz)Indicated
              
              
              1,337
              
              
              7.65
              
              
              0.44
              
              
              0.37
              
              
              0.07
              
              
              0.08
              
              
              329
              
              
              19Inferred
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
  Notes:
  1.
        The
        Mineral Resources for the underground mine were prepared under the supervision
        of Mr. David Penna, P. Geo., who holds the position of Senior Geologist at
        LDI.
  16
  2.
        Mineral resources are in addition to Mineral Reserves. Resources which are
        not
        reserves do not have demonstrated economic viability.
  3.
        Mineral resources are calculated at a cut-off grade 4.5 grams of palladium
        per
        tonne for the underground mine, assuming an average long-term palladium price
        of
        US$325 per ounce and includes by-product metal credits. The cut-off grades
        reflect the current estimated life-of-mine costs of mining and processing,
        in
        conjunction with smelting and transportation costs consistent with current
        contracts.
  4.
        The
        palladium and platinum metal ounces are on a contained basis without adjustment
        for processing or smelting recoveries.
 
 The
        following table sets forth the estimated Offset High Grade Zone resources
        at the
        Lac des Iles Mine as at February 23, 2007:
  **Resources**
              
              **Tonnes**
              
              **Palladium**
              
              **Platinum**
              
              **Gold**
              
              **Copper**
              
              **Nickel**
              
              **Palladium**
              
              **Platinum**(000)
              
              (g/t)
              
              (g/t)
              
              (g/t)
              
              (%)
              
              (%)
              
              (000
                  oz)
              
              (000
                  oz)Indicated
              
              
              3,239
              
              
              5.45
              
              
              0.38
              
              
              0.39
              
              
              0.121
              
              
              0.133
              
              
              568
              
              
              40Inferred
              
              
              12,794
              
              
              5.25
              
              
              0.38
              
              
              0.37
              
              
              0.108
              
              
              0.124
              
              
              2,160
              
              
              156
  Notes:
  1.
        Richard E. Routledge, M.Sc., P. Geo. of Scott Wilson Roscoe Postle Associates
        (“Scott Wilson RPA”) is a qualified person under NI 43-101 and prepared the
        Offset High Grade Zone resource estimate.
  2.
        Resources are in addition to reserves. Resources which are not reserves do
        not
        have demonstrated economic viability.
  3.
        Mineral resources are calculated at a cut-off grade of 3.6 grams of palladium
        equivalent per tonne for the Offset High Grade Zone, assuming an average
        long-term palladium price of US$300 per ounce and includes by-product metal
        credits (platinum = US$875 per ounce, gold = US$500 per ounce, copper = US$1.50
        per pound and nickel = $US7.00 per pound) . Palladium Equivalent = Pd (g/t)
        +
        2.49 x Pt (g/t) + 1.38 x Au (g/t) + 2.72 x Cu (%) + 7.35 x Ni (%).
  4.
        The palladium
        and platinum metal
        ounces are on a contained basis without adjustment for processing or smelting
        recoveries.
  5.
        Mineral resources are stated on a combined basis of the Offset High Grade
        Zone
        and the Roby Footwall Zone
  See
“Note
        to U.S. Shareholders”
  ***Environmental
        Matters***
  The
        expansion of operations at the Lac des Iles Mine in 2000 and 2001 involved
        amending the then existing closure plan under the *Mining
        Act* (Ontario), which included an increase in the amount of financial assurance
        required by the Ministry of Northern Development and Mines (“MNDM”). The closure
        plan and financial assurance agreement were submitted to the MNDM in April
        2001.
        Under the financial assurance agreement, the Corporation is required to provide
        financial assurance of $7.8 million payable in installments of $100,000 per
        month over six years. As at December 31, 2006, the Corporation had approximately
        $8.0 million on deposit with the MNDM.
  17
  The
        Corporation has designed the expanded operations so as not to infringe on
        any
        navigable waters or fish habitat. Consequently, management believes no federal
        approvals or permits are required pursuant to either the *Navigable
        Waters Protection Act* or the *Fisheries
        Act* .
        In
        addition, because federal approvals are not required, an environmental
        assessment under the *Environmental
        Assessment Act* should
        not be necessary. However, if production increases beyond 15,000 tonnes per
        day,
        federal permits may be necessary. This would trigger an environmental assessment
        which may be in the form of a comprehensive study.
  Minimum
        permitting and approvals were required for the underground mine as it is
        an
        extension of the much larger and higher impact open pit operations. The current
        Land Use Permit was expanded by the Ministry of Natural Resources to accommodate
        the additional parking lot, camp facilities and a portion of the tailings
        management facility. Notices of material change regarding the extension of
        the
        mine underground and the east waste dump were submitted to the MNDM and an
        amendment to the Certificate of Approval (Air) for the secondary crusher
        and
        underground operations were submitted to and approved by the Ministry of
        the
        Environment.
  An
        amendment to the closure plan for the extension of the mine underground was
        submitted to the MNDM on December 7, 2005. The closure costs for the combined
        open pit and underground mine were reviewed by an independent engineering
        firm
        which determined that the estimate of $7.8 million was sufficient.
  **Haines-Conacher
        (Shebandowan) Properties**
  On
        December 3, 2003, the Company entered into an option and joint venture agreement
        with Inco Limited on the Haines-Conacher properties which surrounds the past
        producing Shebandowan mine. The agreement was subsequently amended March
        31,
        2006 to include the mine. The Haines-Conacher properties are located
        approximately 80 kilometres southwest of Thunder Bay. In order to earn a
        60%
        interest in the property, the Corporation must make cash payments aggregating
        $200,000 and incur exploration expenditures of $3.0 million on or before
        December 3, 2007.
  Nickel-copper-PGM
        mineralization at Shebandowan occurs as stringer, breccia and massive sulphides
        that are hosted within highly altered and deformed ultramafic bodies which
        have
        been interpreted as basaltic komatiites. In the immediate area around the
        Shebandowan mine, two significant ultramafic units have been recognized,
        a
“Northern” or “Main” unit which was the principle host to the nickel-copper
        mineralization at Shebandowan and a “South” unit.
  As
        a
        follow up to a short 4-hole, diamond drill program totalling 584 metres in
        length in 2005 around the historic “D Zone” located approximately 1,500 metres
        west of the old mine workings, the Corporation completed an eighty-three
        hole
        drill campaign in 2006 totalling 12,511 metres in length. This was an expansion
        of the originally proposed fifteen hole program that focused on testing an
        area
        west of the Number 1 Shaft immediately to the west and along strike of the
        Shebandowan mine containing the “West” Zone and “Road” Zone. The initial results
        of this drilling program were disclosed in a press release dated September
        12,
        2006. The drilling program was completed in late December, 2006 with final
        checking of the data from the internal Quality Control procedures nearing
        completion.
  Encouraging
        intersections encountered in the South unit (including 20.1 metres grading
        1.93%
        nickel, 1.02% copper, 0.94 g/t palladium, 0.18 g/t platinum, 0.16 g/t gold
        and
        0.05% cobalt from one hole) warrant further investigation. An infill drill
        program for the West and Road Zones was initiated around the higher grade
        intercepts to enable a reliable resource estimate to be completed on the
        West,
        Road and D Zones, in addition to the verification of all historic
        data.
  18
  Composite
        drill core samples have been submitted to SGS Lakefield for preliminary
        metallurgical test work to examine the amenability of processing Shebandowan
        mineralization through the Lac des Iles concentrator. A Technical Report
        prepared in compliance with the requirements of National Instrument 43-101
        which
        will disclose the results of the mineral resource estimate at Shebandowan
        is
        expected to be available in the first half of 2007.
  Management
        believes that the mining and trucking to the Lac des Iles mill of small tonnages
        daily of the high nickel-in-sulphide type mineralization from Shebandowan
        could
        have beneficial impacts on the cash flow and the life of mine of the Lac
        des
        Iles Mine. To
        date,
        the Corporation has spent $1.9 million on exploration on the properties.
        Inco
        retains the right to increase its interest from 40% to 60%, exercisable in
        the
        event that a feasibility study on the properties defines a significant nickel
        deposit, by funding the feasibility study implementation costs equal to 200%
        of
        the Corporation’s total expenditures.
  **Shakespeare
        Property**
  On
        September 29, 2005 the Corporation and Ursa Major Minerals Corporation (“URSA”)
        entered into an option and joint venture agreement to evaluate and explore
        a
        nickel, copper and PGE property known as the Shakespeare property located
        120
        kilometres west of the city of Sudbury, Ontario. The property is hosted within
        the Nipissing aged Shakespeare Intrusive.
  The
        agreement provided that the Corporation could acquire a 60% undivided interest
        in URSA’s interest in the Shakespeare property and become the operator by making
        payments to URSA aggregating $1.5 million, making a production decision and
        securing the project financing for commercial production.
  In
        March
        2006, URSA presented to the Corporation the completed feasibility study on
        a
        contemplated open-pit mine and 4,500 tonne per day concentrator. Although
        the
        feasibility study was positive, the rate of return indicated in the study
        did
        not meet the Corporation’s investment criteria and, consequently, the
        Corporation terminated its involvement in the project in September
        2006.
  **Arctic
        Platinum Project**
  On
        March
        24, 2006, the Corporation entered into an agreement (the “Acquisition
        Agreement”) with Gold Fields Exploration B.V. (“GFBV”) and Gold Fields Finland
        Oy (“GFF”) providing for the acquisition by the Corporation of approximately 50%
        of GFF and, in certain circumstances, a 60% interest in GFF and settled the
        terms of a shareholders agreement (the “Shareholders Agreement”) under which the
        Corporation and GFBV will hold their shares of GFF if the Corporation acquires
        an interest in GFF. The Corporation will be the project operator. GFF owns
        platinum group metal properties in Finland known as the Arctic Platinum Project
        (“APP”). During the option period the Corporation will further explore and
        investigate the development of a mining operation at the APP.
  In
        order
        to exercise the option, on or before August 31, 2008 the Corporation must:
        (i)
        complete a rescoping and exploration program; (ii) complete a feasibility
        study;
        (iii) make a production decision and prepare the initial formal development
        proposal and associated budget based on the feasibility study; (iv) incur
        expenditures of US$12.5 million on the APP; and (v) issue 7,381,636 Common
        Shares to GFBV in order to earn a 50% interest or 9,227,033 Common Shares
        to
        earn a 60% interest. The Corporation will advance the earn-in expenditures
        to
        the APP through North American Palladium Finland Oy, its wholly-owned
        subsidiary.
  19
  The
        APP
        covers several advanced stage exploration properties including the Konttijarvi
        and Ahmavaara open pit projects, together known as the Suhanko Project, that
        were the subject of a feasibility study (the “2005 Feasibility Study”) prepared
        by Gold Fields in 2005. The exploration target at Suhanko is for bulk tonnage,
        disseminated to locally semi massive base metals and platinum group elements
        occurring near the base of the Konttijarvi-Suhanko Intrusive.
  The
        APP
        also includes the nearby Narkaus and the Penikat Projects, both of which
        host
        significant platinum group and base metal mineralization.
  The
        Corporation commenced work on the APP late in the first quarter of 2006.
        Three
        drills were mobilized into the Narkaus area to commence exploration and infill
        drilling on the Siika Kama, Kuohunki and Nutturalampi targets and 49 holes
        totalling 8,716 metres were completed and the results from this program were
        released on October 30, 2006. At Suhanko, which was the subject of the 2005
        Feasibility Study, updated resource models are underway. The Corporation
        has
        engaged Aker Kvaerner ASA to complete the rescoping study and P&E Mining
        Consultants Inc. to conduct the open pit designs and optimization. The
        Corporation expects the results of the re-scoping study to be released in
        a
        Technical Report, prepared in compliance with Canadian National Instrument
        43-101 in the second quarter of 2007.
  **DIVIDENDS**
  The
        Corporation has not paid any dividends to date on its Common Shares. In
        addition, the payment of dividends on the Common Shares is restricted under
        the
        terms of the Securities Purchase Agreement (see “Financing - Convertible Note
        Financing”). Accordingly, it is not anticipated that the Corporation will 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 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 board of directors
        may
        consider relevant.
  **CAPITAL
        STRUCTURE**
  The
        authorized share capital of the Corporation consists of an unlimited number
        of
        Common Shares and an unlimited number of special shares, issuable in series.
        There are no special shares outstanding.
  The
        Corporation’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 Corporation,
        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* .
  20
  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 Corporation upon dissolution.
  **MARKET
        FOR SECURITIES**
  The
        Common Shares are listed on the Toronto Stock Exchange under the symbol “PDL”
and on the American Stock Exchange under the symbol “PAL”.
  The
        following table sets out the reported high and low closing prices and aggregate
        trading volume of the Common Shares on the TSX for the periods
        indicated:
  **High**
              
              **Low**
              
              **Volume****2006**January
              
              $
              13.00
              
              $
              9.70
              
              
              1,505,791February
              
              
              14.60
              
              
              10.90
              
              
              2,140,121March
              
              
              14.88
              
              
              10.82
              
              
              1,979,853April
              
              
              14.54
              
              
              11.89
              
              
              1,383,671May
              
              
              12.85
              
              
              9.22
              
              
              1,847,910June
              
              
              10.30
              
              
              7.76
              
              
              828,066July
              
              
              10.13
              
              
              7.62
              
              
              645,969August
              
              
              8.95
              
              
              7.27
              
              
              631,942September
              
              
              9.51
              
              
              7.52
              
              
              471,755October
              
              
              9.50
              
              
              7.83
              
              
              401,057November
              
              
              10.95
              
              
              8.59
              
              
              927,969December
              
              
              10.22
              
              
              8.50
              
              
              846,554**2007**January
              
              
              9.71
              
              
              7.98
              
              
              1,045,100February
              
              
              9.86
              
              
              8.80
              
              
              980,300March
                  1 - March 20
              
              
              9.17
              
              
              7.81
              
              
              682,100
 
 **DIRECTORS
        AND EXECUTIVE OFFICERS**
  The
        following table sets forth certain information with respect to the directors
        and
        executive officers of the Corporation:
  **Name
                  and municipality**
                **of
                  residence**
              
              **Position(s)
                  held**
              
              **Principal
                  occupation**
              
              **Director
                  since**Michael
                  P. Amsden, P.Eng.(4)
                Oakville,
                  Ontario
              
              Director
              
              Retired
                  senior mining executive
              
              April
                  1995Steven
                  R. Berlin, C.P.A.(1)(2)(3)
                Tulsa,
                  Oklahoma
              
              Director
              
              Part-time
                  consultant
              
              February
                  2001
  21
  **Name
                  and municipality**
                **of
                  residence**
              
              **Position(s)
                  held**
              
              **Principal
                  occupation**
              
              **Director
                  since**
 C.
                  David A. Comba(1)(4)
                Toronto,
                  Ontario
              
              Director
              
              Graduate
                  geologist and retired executive
              
              March
                  2006André
                  J. Douchane(4)
                Sante
                  Fe, New Mexico
              
              Chairman
                  and director
              
              Consultant
              
              April
                  2003Robert
                  J. Quinn(1)(2)(3)
                Kingwood,
                  Texas
              
              Director
              
              Director,
                  Quinn & Brooks LLP,
              
              June
                  2006Gregory
                  J. Van Staveren, C.A.,
                C.P.A.(1)(2)(3)
                Toronto,
                  Ontario
              
              Director
              
              Strategic
                  financial consultant
              
              February
                  2003William
                  J. Weymark
                West
                  Vancouver, British Columbia
              
              Director
              
              President
                  and Chief Executive Officer, Vancouver Wharves Ltd.,
              
              January
                  2007James
                  D. Excell
                Kelowna,
                  British Columbia
              
              President
                  and Chief Executive Officer
              
              Officer
                  of the Corporation
              
              -Michael
                  C. Thompson, F.C.C.A.
                Thunder
                  Bay, Ontario
              
              Manager
                  Administration and Senior Controller
              
              Officer
                  of the Corporation
              
              -David
                  Passfield
                Ajax,
                  Ontario
              
              Vice
                  President, Operations
              
              Officer
                  of the Corporation
              
              -Reno
                  Pressacco
                Oakville,
                  Ontario
              
              Vice
                  President Exploration
              
              Officer
                  of the Corporation
              
              -
  (1)  Member
        of
        the Audit Committee
  (2)  Member
        of
        the Compensation Committee
  (3)  Member
        of
        the Governance and Nominating Committee
  (4)  Member
        of
        the Technical Committee
  The
        term
        of office for each director expires at each annual meeting of
        shareholders.
  Each
        director or officer listed above has held the same principal occupation during
        the past five years except as described below:
  Mr.
        Berlin, prior to January 2006, was a Vice President of Kaiser-Francis Oil,
        the
        Corporation’s principal shareholder. Prior to January 30, 2004, he was also
        Chief Financial Officer and Treasurer of PetroCorp Incorporated, an oil and
        natural gas company. Mr. Berlin is the nominee of Kaiser-Francis, which has
        advised the Corporation that it intends to vote the Common Shares which it
        owns
        in favour of his re-election as a director at the 2007 annual meeting of
        shareholders.
  Mr.
        Comba, prior to May 2005, was an industry association executive.
  Mr.
        Douchane, prior to January 2006, was President and Chief Executive Officer
        of
        the Corporation and, prior to April 2002, was President of Management Inc.,
        a
        management consulting firm. In January 2007, Mr. Douchane was appointed
        President and CEO of Starfield Resources Inc. an exploration and development
        company in Nunavut.
  22
  Mr.
        Excell, prior to December 31, 2005, was President of Narego Solutions Inc.,
        a
        consulting company that provides strategic planning services to junior mining
        companies and, prior to January 2004, was President and Chief Operating Officer
        of EKATI Diamond Mine, operated by BHP Billiton Diamonds Inc. BHP Billiton
        Diamonds Inc., a diamond mining company, is part of the BHP Billiton Group,
        a
        diversified resource company.
  Mr.
        Passfield, prior to October 2, 2006 was Vice President and General Manager
         of Grande Cache Coal Corporation, an operating  metallurgical coal
        mining company located in Alberta. 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.
  Mr.
        Pressacco, prior to February 19, 2007, was Senior Geologist with Micon
        International Limited, a consulting firm that provides full services to the
        mining industry world-wide.  Prior to October 2003, Mr. Pressacco
        maintained a private practice, providing geological services to mining companies
        operating in northeastern Ontario and, prior to February 2003, was Senior
        Geologist with Agrium Inc, Kapuskasing Phosphate Operations which provided
        concentrates of rock phosphate as feedstock for the preparation of phosphate
        fertilizer.
  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 Corporation is 29,286, which is less than 1% of the Common Shares issued
        and
        outstanding.
  **Cease
        Trade Orders, Bankruptcies, Penalties or Sanctions**
  Mr.
        Berlin was a director of Ozark Airlines, Inc., doing business as Great Plains
        Airlines, Inc. (“Great Plains”), 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.
  **Conflicts
        of Interest**
  There
        are
        potential conflicts to which the directors of the Corporation are subject
        in
        connection with the business and operations of the Corporation. 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
        Corporation hold positions with other companies that explore for or produce
        platinum group metals or have other business interests which may potentially
        conflict with the interests of the Corporation.
  Mr.
        Berlin is the nominee of Kaiser-Francis, the Corporation’s principal
        shareholder, on the board of directors of the Corporation. Kaiser-Francis
        has
        also been a lender to the Corporation (see “Financings”).
  Mr.
        Douchane was appointed President and CEO of Starfield Resources Inc., a TSX
        Venture exchange listed company in January 2007. Starfield Resources is focused
        on exploration and development of its 100% owned Ferguson Lake
        nickel-copper-cobalt-palladium-platinum property located in
        Nunavut.
  Mr.
        Comba
        is a director of First Nickel Inc., a TSX listed company, which operates
        the
        Lockerby Mine in Sudbury, Ontario, a nickel, copper and cobalt producer with
        platinum group credits and is actively exploring for nickel deposits in Sudbury
        and Timmins, Ontario.
  23
  **LEGAL
        PROCEEDINGS**
  The
        Corporation, 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, pre-judgment and post-judgment interest
        and
        costs. The Corporation filed a statement of defense 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 Corporation 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 10 years. No provision in the financial statements has been made
        in
        respect of any possible loss from the action as management believes that
        the
        Corporation has a valid defence and the Sheridan Group has indemnified the
        Corporation.
  The
        Corporation has filed a claim with its insurance company relating to losses
        incurred in connection with the failure of the primary crusher in 2002. During
        2004, the Corporation received $7,148,000 as an interim payment against this
        claim and has included this amount in income from mining operations. The
        Corporation is pursuing the balance of its insurance claim and will record
        any
        additional recovery in income if and when received.
  From
        time
        to time, the Corporation 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 Corporation’s management, these claims
        and lawsuits in the aggregate, even if adversely settled, will not have a
        material effect on the consolidated financial statements of the
        Corporation.
  **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 Corporation 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 Corporation, except
        as follows:
  1.
              Kaiser-Francis
                  is a party to the credit facilities described under “Financing -
                  Kaiser-Francis Credit Facilities”.
  2.
              Kaiser-Francis
                  is a party to the Securities Purchase Agreement described under
“Financing
                  - Convertible Note Financing”.
  **TRANSFER
        AGENT**
  Computershare
        Investor Services Inc. is the registrar and transfer agent of the Common
        Shares
        in Toronto, Ontario, Canada and Computershare Trust Company, Inc. is the
        registrar and co-transfer agent for the Common Shares in Golden, Colorado,
        United States.
  24
  **MATERIAL
        CONTRACTS**
  The
        Senior Credit Facilities, the Securities Purchase Agreement and the Platinum
        and
        Palladium Purchase Agreement described in the section titled “Financings”, and
        the Acquisition Agreement described under “Arctic Platinum Properties” are the
        only contracts that are material to the Corporation and are still in
        effect.
  **INTERESTS
        OF EXPERTS**
  Scott
        Wilson RPA was engaged to prepare the the mineral resource estimate for the
        Offset High Grade Zone as at February 23, 2007. Neither of Mr. Routledge
        or
        Scott Wilson RPA owned securities of the Corporation when the services were
        provided and no securities of the Corporation were issued to Mr. Routledge
        or to
        Scott Wilson RPA as compensation for their services in connection with the
        mineral reserve and resource estimates.
  KPMG
        LLP,
        the external auditors of the Corporation, prepared the “Auditor’s Report to the
        Shareholders of North American Palladium Ltd.” with respect to the consolidated
        financial statements of the Corporation as at December 31, 2004, 2005 and
        2006
        and for each of the years then ended. KPMG LLP is independent in accordance
        with
        the auditors’ rules of professional conduct of Ontario, and has complied with
        the United States Securities and Exchange Commission’s rules on auditor
        independence.
  **RISK
        FACTORS**
  The
        Corporation’s securities are subject to the following risks. If any of the risks
        occur, the Corporation’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.
  *The
        Corporation cannot assure that it will meet its goals for production and
        operating costs and if it does not, its operating results will be adversely
        affected.*
  Planned
        production levels and operating costs are estimated based on the Corporation’s
        experience in operating its mine. These estimates are subject to numerous
        uncertainties, many of which are beyond the Corporation’s control. The
        Corporation cannot make 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.
  *If
        mineral resource and mineral reserve estimates are not accurate, production
        may
        be less than estimated which would adversely affect the Corporation’s financial
        condition and results of operations.*
  Mineral
        resource and mineral reserve estimates are imprecise and depend on geological
        analysis based partly on statistical inferences drawn from drilling, which
        may
        prove unreliable, and assumptions about operating costs and metal prices.
        The
        Corporation cannot be certain that the mineral resource or mineral 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:
  ·
              mineralization
                  or formations at the mine could be different from those predicted
                  by
                  drilling, sampling and similar
                  examinations;
 ·
              declines
                  in the market price of palladium or by-product metals may render
                  the
                  mining of some or all of the reserves
                  uneconomic;
 ·
              changes
                  in the life-of-mine plan and/or ultimate pit design;
                  and
  25
  ·
              the
                  grade of ore may vary significantly from time to time and the Corporation
                  cannot give any assurances that any particular quantity of metal
                  will be
                  recovered from the reserves.
  The
        occurrence of any of these events may cause the Corporation to adjust the
        mineral resource or mineral reserve estimates or change its mining plans,
        which
        could negatively affect the Corporation’s financial condition and results of
        operation. Moreover, short-term factors, such as the need for additional
        development of the ore body or the processing of new or different grades,
        may
        impair its profitability in any particular accounting period.
  *The
        risks and hazards associated with mining and processing may increase costs
        and
        reduce profitability in the future.*
  Mining
        and processing operations involve many risks and hazards, including among
        others:
  ·
              environmental
                  hazards;
 ·
              mining
                  and industrial accidents;
 ·
              metallurgical
                  and other processing problems;
 ·
              unusual
                  and unexpected rock formations;
 ·
              pit
                  slope failures;
 ·
              flooding
                  and periodic interruptions due to inclement or hazardous weather
                  conditions or other acts of nature;
 ·
              mechanical
                  equipment and facility performance problems;
                  and
 ·
              unavailability
                  of materials, equipment and
                  personnel.
  These
        risks could result in, among other things:
  ·
              damage to, or destruction of, the Corporation’s
                properties or production facilities;  ·
              personal
                  injury or death;
 ·
              environmental
                  damage;
 ·
              delays
                  in mining;
 ·
              increased
                  product costs;
 ·
              asset
                  write downs;
 ·
              monetary
                  losses; and
 ·
              possible
                  legal liability.
  The
        Corporation cannot be certain that its insurance will cover the risks associated
        with mining or that it will be able to maintain insurance to cover these
        risks
        at affordable premiums. The Corporation might also become subject to liability
        for pollution or other hazards against which it cannot insure or against
        which
        the Corporation may elect not to insure because of premium costs or other
        reasons. Losses from such events may increase costs and decrease
        profitability.
  *If
        the Corporation fails to maintain projected production levels for its
        underground mining operations, its ability to generate revenue and profits
        will
        be adversely affected.*
  The
        Corporation’s future prospects will be negatively affected if the underground
        mine fails to maintain projected production levels. Unforeseen conditions
        or
        developments could arise during the operation of the underground mine which
        would increase operating costs and adversely affect the Corporation’s ability to
        generate revenue and profits. These events may include, among
        others:
  ·
              shortages
                  of equipment, materials or labour;
  26
  ·
              delays
                  in delivery of equipment or
                  materials;
 ·
              labour
                  disruptions;
 ·
              adverse
                  weather conditions or natural
                  disasters;
 ·
              unanticipated
                  increases in costs of labour, supplies and
                  equipment;
 ·
              accidents;
                  and
 ·
              unforeseen
                  engineering, design, environmental or geological
                  problems.
  *Future
        exploration at Lac des Iles Mine or elsewhere may not result in increased
        reserves, which would prevent the Corporation from sustaining its targeted
        production levels.*
  The
        Corporation conducts exploration programs at and surrounding the Lac des
        Iles
        Mine with the objective of increasing its mineral resources and mineral
        reserves. Mineral exploration involves significant risks over a substantial
        period of time, which even a combination of careful evaluation, experience
        and
        knowledge may not eliminate. Even if the Corporation discovers a valuable
        deposit of minerals, it may be several years before production is possible
        and
        during that time it may become economically unfeasible to produce those
        minerals. There is no assurance that current or future exploration programs
        will
        result in any new economically viable mining operations or yield new reserves
        to
        replace and expand current reserves at the Lac des Iles Mine. In the event
        that
        new mineral resources or mineral reserves are not discovered, the Corporation
        may not be able to sustain production beyond 2010 or earlier.
  *The
        Corporation faces strong competition from other mining companies for the
        acquisition of new properties.*
  Mines
        have limited lives and, as a result, the Corporation continually seeks to
        replace and expand its reserves through the acquisition of new properties.
        In
        addition, there is a limited supply of desirable mineral lands available
        in
        areas where the Corporation would consider conducting exploration and/or
        production activities. Because the Corporation faces strong competition for
        new
        properties from other mining companies, many of which have greater financial
        resources than it, the Corporation may be unable to acquire attractive new
        mining properties on terms acceptable to it.
  *The
        Corporation depends on a single mine to generate revenues and, if mining
        operations are interrupted, the Corporation’s business will
        suffer.*
  All
        of
        the Corporation’s revenues are derived from its mining operations at the Lac des
        Iles Mine, which is the Corporation’s only mine and the only place it has
        reserves. If there is an interruption in operations at the Lac des Iles Mine,
        or
        if the Corporation can no longer extract ore from this mine for any reason,
        the
        Corporation’s business will suffer significantly. In addition, any adverse
        condition affecting mining conditions at the Lac des Iles Mine could have
        a
        material adverse effect on the Corporation’s financial performance and results
        of operations until such time as the condition is remedied.
  *The
        Corporation is dependent on a third party for smelting and refining its
        palladium and if the third party is unable to accommodate the Corporation’s
        smelting and refining requirements or the existing contract is terminated
        or not
        renewed the Corporation’s ability to generate revenues could be
        harmed.*
  The
        Corporation has a smelter agreement with Xstrata which provides for the smelting
        and refining of the principal metals contained in the concentrates produced
        at
        Lac des Iles Mine. The existing agreement with Xstrata expires on April 30,
        2007. The agreement with Xstrata can be terminated in certain circumstances,
        such as default of performance. The inability to renew this agreement under
        similar terms or the termination of the agreement could have a material adverse
        affect on the Corporation’s financial performance and results of operations
        until such time as alternative smelting and refining arrangements can be
        made or
        alternative purchasers of the Corporation’s concentrates can be found.
  27
  *The
        Corporation’s vulnerability to changes in metal prices may cause the Common
        Share price to be volatile and may affect the Corporation’s operations and
        financial results.*
  The
        Corporation’s primary source of revenue is the sale of palladium. In fiscal
        2006, sales of palladium accounted for approximately 48% of the Corporation’s
        revenues. Historically, changes in the market price of palladium have
        significantly impacted the Corporation’s profitability and Common Share price.
        The Corporation’s financial results are very sensitive to external economic
        criteria related to the palladium price. A major risk will arise if there
        is a
        significant weakening of the U.S. dollar combined with a prolonged period
        of
        lower palladium prices. Many factors beyond the Corporation’s control influence
        the market price of palladium. These factors include:
  ·
              global
                  supply and demand;
 ·
              availability
                  and costs of metal substitutes;
 ·
              speculative
                  activities;
 ·
              international
                  political and economic conditions; and
 ·
              production
                  levels and costs in other platinum group metal-producing countries,
                  particularly Russia and South
                  Africa.
  Economic
        and political events in Russia could result in declining market prices. If
        Russia disposes of substantial amounts of palladium, platinum, rhodium,
        ruthenium, osmium and iridium, which are referred to as platinum group metals,
        from stockpiles or otherwise, the increased supply could reduce the market
        prices of palladium and platinum and adversely affect the Corporation’s
        profitability and Common Share price. Russia’s economic problems make Russian
        stockpiles difficult to predict and the risk of sales from stockpiles more
        significant.
  *Since
        the Corporation’s revenues are in United States dollars and expenditures are in
        Canadian dollars, the Corporation is subject to fluctuations in exchange
        rates
        between the United States and Canadian dollars.*
  Currency
        fluctuations may affect cash flow since the Corporation’s production currently
        is sold in United States dollars, whereas the Corporation’s administration,
        operating and exploration costs are incurred in Canadian dollars. Exploration
        costs and other property costs will also be incurred in Euros. Significant
        long
        term fluctuations in relative currency values could adversely affect the
        Corporation’s results of operations. In particular, the Corporation may be
        adversely affected by a significant strengthening of the Canadian dollar
        against
        the United States dollar. In addition, the Corporation’s financial results are
        sensitive to fluctuations in the exchange rate. A major risk will arise if
        there
        is a significant weakening of the U.S. dollar combined with a prolonged period
        of lower palladium spot prices.
  *The
        Corporation’s inability to renew its collective agreement on acceptable terms
        upon its expiry in February 2009 could have a material adverse affect on
        the
        Corporation.*
  The
        Corporation’s collective agreement with the United Steel Workers of America, the
        union representing the employees at the Lac des Iles mine (other than employees
        at or above the rank of foreman, safety coordinator, surveyors, dispatchers,
        technical staff and office, clerical and security personnel), will expire
        in
        February 2009. The inability to renew the agreement on acceptable terms could
        have a material adverse affect on the Corporation, including the affect of
        work
        stoppages or strikes on the results of operations and financial performance
        of
        the Corporation.
  28
  *The
        Corporation is subject to extensive environmental legislation and the costs
        of
        complying with these regulations may be significant.*
  Environmental
        legislation relating to land, air and water affects nearly all aspects of
        the
        Corporation’s operations. This legislation requires the Corporation to obtain
        various operating licenses and also imposes standards and controls on activities
        relating to the exploration, development and production of palladium and
        associated metals. The cost of obtaining operating licenses and abiding by
        standards and controls on its activities may be significant. Further, if
        the
        Corporation fails to obtain or maintain such operating licenses or breaches
        such
        standards or controls imposed on its activities, it may not be able to continue
        its operations in its usual manner, or at all, or the Corporation may be
        subject
        to fines or other claims for remediation which may have a material adverse
        impact on its operations or financial results.
  The
        Corporation will be responsible for all costs of closure and reclamation
        at the
        Lac des Iles Mine. Under applicable environmental legislation, the Corporation
        had to establish a trust fund to prepare for closure and reclamation. The
        current amended mine closure plan requires $7.8 million for clean-up and
        restoration of the mine site. The trust fund, maintained by the Ontario Ministry
        of Northern Development and Mines, is designed to collect $7.8 million through
        instalments of $100,000 per month. The money in the trust fund will become
        available to the Corporation as the mine closure is completed. At February
        20,
        2007, approximately $8.0 million including accrued interest was on deposit
        in
        the trust fund. Development of the underground mine as planned required an
        amendment to the existing closure plan and may result in an increase in the
        amount of financial assurance required by the Ontario Ministry of Northern
        Development and Mines. The actual amount needed for the closure of the Lac
        des
        Iles Mine may be materially more than the original estimate. Changes in the
        Province of Ontario mining regulations may require the Corporation to provide
        a
        letter of credit or other financial instrument as security for the closure
        of
        the Lac des Iles Mine.
  *Changes
        in environmental legislation could increase the costs of complying with
        applicable regulations and reduce levels of production.*
  Changes
        in environmental laws, new information on existing environmental conditions
        or
        other events may increase future compliance expenditures or otherwise have
        a
        negative effect on the Corporation’s financial condition and results of
        operation. In addition to existing requirements, it is expected that other
        environmental regulations will likely be implemented in the future with the
        objective of further protecting human health and the environment. Some of
        the
        issues currently under review by environmental agencies include reducing
        or
        stabilizing air emissions, mine reclamation and restoration, and water quality.
        Other changes in 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 Corporation to predict their impact. The Corporation anticipates capital
        expenditures and operating expenses will increase as a result of compliance
        with
        the introduction of new and more stringent environmental regulations. Failure
        to
        comply with environmental legislation may result in the issuance of clean
        up
        orders, imposition of penalties, liability for related damages and the loss
        of
        operating permits. The Corporation cannot give assurances that it will at
        all
        future times be in compliance with all federal and provincial environmental
        regulations or that steps to bring the Corporation into compliance would
        not
        have a negative effect on its financial condition and results of
        operation.
  *Compliance
        with current and future government regulations may cause the Corporation
        to
        incur significant costs and slow its growth.*
  The
        Corporation’s activities are subject to extensive Canadian federal and
        provincial laws and regulations governing matters relating to mine safety,
        occupational health, labour standards, prospecting, exploration, production,
        exports and taxes. Compliance with these and other laws and regulations could
        require the Corporation to make significant capital outlays which may slow
        its
        growth by diverting its financial resources. The enactment of new adverse
        regulations or regulatory requirements or more stringent enforcement of current
        regulations or regulatory requirements may increase costs, which could have
        a
        harmful effect on the Corporation. The Corporation cannot make assurances
        that
        it will be able to adapt to these regulatory developments on a timely or
        cost
        effective basis. Violations of these regulations and regulatory requirements
        could lead to substantial fines, penalties or other sanctions.
  29
  *The
        Corporation is required to obtain and renew governmental permits in order
        to
        conduct mining operations, which is often a costly and time-consuming
        process.*
  In
        the
        ordinary course of business, the Corporation is required to obtain and renew
        governmental permits for the operation and expansion of existing operations
        or
        for the commencement of new operations. Obtaining or renewing the necessary
        governmental permits is a complex and time-consuming process. The duration
        and
        success of the Corporation's efforts to obtain and renew permits are contingent
        upon many variables not within the Corporation’s control including the
        interpretation of applicable requirements implemented by the permitting
        authority and aboriginal consultation. The Corporation 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 what the Corporation expects. Any unexpected delays
        or
        costs associated with the permitting process could delay the development
        or
        impede the operation of a mine, which could adversely affect the Corporation’s
        revenues and future growth.
  *The
        Corporation faces competition with other larger suppliers of platinum group
        metals and from potential new sources of platinum group
        metals.*
  The
        Corporation competes with other suppliers of platinum group metals, many
        of
        which are significantly larger than it is and have access to greater mineral
        reserves and financial resources than it does. In addition, new mines may
        open
        which would increase supply of palladium and platinum. Furthermore, in certain
        industrialized countries an industry has developed for the recovery of platinum
        group metals from scrap sources, mostly from spent automobile and industrial
        catalysts. The Corporation may not be successful in competing with these
        existing and emerging platinum group metal producers.
  *The
        development of new technology or new alloys could reduce the demand for
        palladium and platinum.*
  The
        development of a substitute alloy or synthetic material which has catalytic
        characteristics similar to platinum group metals would 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
        reduce the demand for palladium and platinum. Demand might also be reduced
        by
        manufacturers in such industries as automobiles, electronics and dentistry
        finding substitutes for palladium. The dentistry and electronics industries
        have
        already experienced advances in new technology which use base metals as a
        substitute for palladium in certain component parts. High prices for palladium
        would create an incentive for the development of substitutes. Any such
        developments could have a material adverse effect on the Corporation’s financial
        condition and results of operations.
  *If
        the Corporation loses key personnel or is unable to attract and retain
        additional personnel, the Corporation’s mining operations and prospects could be
        harmed.*
  The
        Corporation is dependent upon the services of a small number of members of
        senior management including James D. Excell, the President and Chief Executive
        Officer. The Corporation’s current mining operations and its future prospects
        depends on the experience and knowledge of these individuals. The Corporation
        does not maintain any “key man” insurance. The loss of one or more of these
        individuals could have a material adverse affect on the Corporation’s mining
        operations.
  30
  *The
        Corporation’s credit facilities have events of default, some of which are beyond
        the Corporation’s control.*
  The
        Corporation has borrowed funds under its credit facilities to finance its
        operations. The credit facilities and the Convertible Notes contain certain
        events of default, some of which are beyond the Corporation’s control, the
        occurrence of which could require the Corporation to pay back immediately
        all
        amounts borrowed under the credit facilities.
  *The
        Corporation’s hedging activities or its decision not to hedge could expose it to
        losses.*
  From
        time
        to time, the Corporation engages in hedging activities in connection with
        the
        metals it produces, such as forward sales contracts and commodity put and
        call
        option contracts, to partially offset the risk of declines in metal prices
        on
        its operating results. While these hedging activities may protect the
        Corporation against low metal prices, they may also limit the price it can
        receive on hedged products. As a result, the Corporation 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 Corporation may experience losses if a counterparty fails to purchase
        under
        a contract when the contract price exceeds the spot price of a
        commodity.
  **AUDIT
        COMMITTEE INFORMATION**
  **Audit
        Committee Charter**
  The
        Audit
        Committee charter is set out commencing at page 33 .
  **Composition
        of the Audit Committee**
  The
        Committee is comprised of Gregory J. Van Staveren (Chairman), David Comba,
        Robert Quinn and Steven R. Berlin. Mr. Van
        Staveren, Mr. Comba and Mr. Quinn are independent as
        such
        term is defined in Multilateral Instrument 52-110 - Audit Committees (“MI
        52-110”). Mr.
        Berlin is not a voting member of the audit committee and serves in the capacity
        of an observer. Mr. Berlin is not considered independent, as that term is
        defined by
        virtue
        of the fact
        that p rior
        to
        January 1, 2006, Mr. Berlin served
        as
        an executive officer of Kaiser Francis Oil Registrant, which owns approximately
        50% of the outstanding common shares of the Corporation. Mr. Berlin does
        satisfy
        the requirements of Rule 10A-3 under 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 Committee is financially literate. Each of Mr. Van Staveren
        and Mr. Berlin satisfies the criteria required for the financial expert and
        Mr.
        Van Staveren is designated as the audit committee 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 companies. Prior to February 1998, Mr. Van
        Staveren was a partner with KPMG LLP.
  Mr.
        Berlin is a certified public accountant and, prior to January 1, 2006, was
        a
        Vice President of Kaiser-Francis and prior to December 2004 was Co-Chief
        Financial Officer of Kaiser-Francis. Mr. Berlin also served as Chief Financial
        Officer and Treasurer of PetroCorp Incorporated, an oil and gas company prior
        to
        January 2004.
  31
  Both
        Mr.
        Comba and Mr. Quinn have extensive management experience with extensive focus
        in
        the mining sector
  **Reliance
        on Certain Exemptions**
  As
        noted
        above, the Corporation is relying on the exemption contained in section 3.5
        ( *Death,
        Disability or Resignation of Audit Committee Member* )
        of MI
        52-110 in connection with Mr. Berlin’s current membership on the Audit
        Committee.
  **Audit
        Committee Pre-Approval Policies and Procedures**
  All
        audit
        and non-audit services performed by the Corporation’s external auditors are
        pre-approved by the Audit Committee.
  **External
        Auditor Service Fees**
  ***Audit
        Fees***
  The
        aggregate fees billed by KPMG LLP (“KMPG”), the Corporation’s external auditors
        for the fiscal years ended December 31, 2006 and 2005, for professional services
        that are normally provided by the external auditors in connection with statutory
        and regulatory filings or engagements for that year were $442,160 and $329,640,
        respectively.
  ***Audit-Related
        Fees***
  The
        aggregate fees billed by KPMG for the fiscal years ended December 31, 2006
        and
        2005 for assurance and related services rendered by it that are reasonably
        related to the performance of the audit or review of the Registrant’s financial
        statements engagements for that year were $185,714 and $30,820,
        respectively.
  ***Tax
        Fees***
  The
        aggregate fees billed by KPMG for the fiscal years ended December 31, 2006
        and
        2005 for professional services rendered by it for tax compliance, tax advice,
        tax planning and other services were $39,503 and $12,075, respectively. Tax
        services provided included preparation of corporate tax returns and review
        of
        tax provisions.
  ***All
        Other Fees***
  Other
        products and services provided included accounting support. The aggregate
        fees
        billed by KPMG for the fiscal years ended December 31, 2006 and 2005 for
        products and services provided by KPMG, other than the services reported
        in the
        preceding three paragraphs, were $nil and $nil, respectively.
  **ADDITIONAL
        INFORMATION**
  Additional
        information relating to the Corporation may be found on SEDAR at www.sedar.com.
        Additional information, including directors’ and officers’ remuneration and
        indebtedness, principal holders of the Corporation’s securities and securities
        authorized for issuance under equity compensation plans, is contained in
        the
        Corporation’s management proxy circular. As well, additional financial
        information is provided in the Corporation’s annual financials statements for
        the year ended December 31, 2006 and management’s discussion and analysis of
        operations and financial results.
  32
  **AUDIT
        COMMITTEE CHARTER**
  **1.**
              **Composition**
  a)
              The
                  Audit Committee shall consist of a minimum of three directors of
                  the
                  Corporation.
  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.
  b)
              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 Corporation’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 Corporation 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 Corporation’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:
  33
  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;
  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 Charter on an annual
                  basis;
  b)
              Meet
                  with the Corporation’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 Corporation 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 Corporation 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
                  Corporation;
  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
                  Corporation;
  h)
              Review
                  the plan and scope of the audit to be conducted by the internal
                  (if any)
                  and external auditors of the
                  Corporation;
  34
  i)
              Approve,
                  or recommend to the Board for approval, the compensation of the
                  external
                  auditors;
  j)
              Directly
                  oversee the work of the external auditors, including reviewing
                  the
                  Corporation’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
                  Corporation or its subsidiary entities by its external auditors
                  or the
                  external auditors of the Corporation’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)
              Review
                  all annual and interim earnings press
                  releases;
  o)
              Determine
                  that adequate procedures are in place for the review of the Corporation’s
                  disclosure of financial information extracted or derived from the
                  Corporation’s financial statements, other than disclosure in the
                  Corporation’s financial statements, management’s discussion and analysis
                  and earnings press releases, and periodically assess the adequacy
                  of these
                  procedures;
  p)
              Establish
                  procedures for:
  i.
              The
                  receipt, retention and treatment of complaints received by the
                  Corporation
                  regarding accounting, internal accounting controls, or auditing
                  matters;
                  and
  ii.
              The
                  confidential, anonymous submission by employees of the Corporation
                  of
                  concerns regarding questionable accounting or auditing
                  matters;
  q)
              Enquire
                  as to the adequacy of the Corporation’s system of internal
                  controls;
  r)
              Review
                  and approve all related party
                  transactions;
  s)
              Review
                  and approve the Corporation’s hiring policies regarding employees and
                  former employees of the present and former external auditors of
                  the
                  Corporation;
  t)
              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, of inspecting all of the
                  books and
                  records of the Corporation and its affiliates and of discussing
                  such
                  accounts and records and any matters relating to the financial
                  position or
                  condition of the Corporation with the officers and internal (if
                  any) and
                  external auditors of the Corporation and its
                  affiliates;
  35
  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
                  an audit
                  report or performing other audit, review or attest services for
                  the
                  Corporation;
  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 Corporation shall, at the expense of the
                  Corporation, 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
                  Corporation.
  36
  **GLOSSARY
        OF TERMS**
  The
        following is a glossary of certain terms used in this document.
  “ **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.
  “ **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 parametres: 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
        PGMs
        prices.
  “ **diamond
        drilling** ”
means
        rotary drilling using diamond impregnated bits to produce a solid continuous
        core sample of the underlying rock.
  “ **feasibility
        study** ”
means
        a
        program to establish whether a mineral deposit can be successfully mined
        considering technical and economic parametres.
  “ **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.
  “ **gabbronorite** ”
means
        a
        type of gabbro which contains the mafic minerals clinopyroxene (Ca-Mg rich
        silicate) and orthopyroxene (Mg-rich silicate).
  “ **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 ton of ore delivered
        to the concentrator.
  “ **indicated
        mineral 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
        parametres, 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. See
“Note
        to U.S. Shareholders”.
  37
  “ **inferred
        mineral 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. See “Note to U.S. Shareholders”.
  “ **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, jewelery,
        resistance wiring, electronic contacts and electrodes.
  “ **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 parametres, 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. See “Note to U.S. Shareholders”.
  “ **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. See “Note to U.S.
        Shareholders”.
  “ **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 continuity of a
        mineral resource are known, estimated or interpreted from specific geological
        evidence and knowledge. See “Note to U.S. Shareholders”.
  “ **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.
  “ **open
        pit** ”
means
        a
        mine worked at the surface.
  “ **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.
  38
  “ **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, jewelry
        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. See “Note to U.S.
        Shareholders”.
  “ **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.
  “ **proven
        mineral reserve** ”
means
        the economically mineable part of 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
        is
        justified. See “Note to U.S. Shareholders”.
  “ **pyroxenite** ”
means
        an ultramafic rock which predominantly contains the mafic mineral pyroxene
        (Mg-rich silicate).
  “ **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.
  39
  “ **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** ”
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.)
  “ **waste** ”
means
        barren rock in a mine, or mineralized material that is too low in grade to
        be
        mined and milled at a profit.
  40




**Document
      No. 2**













Management’s
        Responsibility for
 Financial
        Statements
  The
        accompanying consolidated financial statements have been prepared by management
        in accordance with Canadian generally accepted accounting principles (GAAP).
        Financial statements include certain amounts based on estimates and judgments.
        When an alternative method exists under Canadian GAAP, management has chosen
        that which it deems most appropriate in the circumstances in order to ensure
        that the consolidated financial statements are presented fairly, in all material
        respects, in accordance with Canadian generally accepted accounting principles.
        The financial information presented elsewhere in the annual report is consistent
        with that in the consolidated financial statements.
  The
        Company maintains adequate systems of internal accounting and administrative
        controls. Such systems are designed to provide reasonable assurance that
        transactions are properly authorized and recorded, the Company’s assets are
        appropriately accounted for and adequately safeguarded and that the financial
        information is relevant and reliable.
  The
        Board
        of Directors of the Company is responsible for ensuring that management fulfills
        its responsibilities for financial reporting, and is ultimately responsible
        for
        reviewing and approving the consolidated financial statements and the
        accompanying management’s discussion and analysis. The Board of Directors
        carries out this responsibility principally through its Audit Committee.
  The
          Audit
          Committee is appointed by the Board of Directors and all of its members
          are
          non-management directors. The Audit Committee meets periodically with management
          and the external auditors to discuss internal controls, auditing matters
          and
          financial reporting issues, and to satisfy itself that each party is properly
          discharging its responsibilities. The Audit Committee also reviews the
          consolidated financial statements, management’s discussion and analysis, the
          external auditors’ report, examines the fees and expenses for audit services,
          and considers the engagement or reappointment of the external auditors.
          The
          Audit Committee reports its findings to the Board of Directors for its
          consideration when approving the consolidated financial statements for
          issuance to the shareholders. KPMG LLP, the external auditors, have full
          and
          free access to the Audit Committee.
  James
                  D. Excell
              
              Michael
                C. ThompsonPresident
                  and CEO
              
              Manager
                  of Administrationand
                Senior Controller andacting
                  Chief Financial OfficerToronto,
                  CanadaFebruary
                  27, 2007
  
 1
  
  Auditors’
        Report to the Shareholders of
 North
        American Palladium Ltd.
  We
        have
        audited the consolidated balance sheets of North American Palladium Ltd.
        as at
        December 31, 2006 and 2005 and the consolidated statements of loss and deficit
        and cash flows for each of the years in the three-year period ended December
        31,
        2006. These financial statements are the responsibility of the Company’s
        management. Our responsibility is to express an opinion on these financial
        statements based on our audits.
  We
        conducted our audits in accordance with Canadian generally accepted auditing
        standards. Those standards require that we plan and perform an audit to obtain
        reasonable assurance whether the financial statements are free of material
        misstatement. An audit includes examining, on a test basis, evidence supporting
        the amounts and disclosures in the financial statements. An audit also includes
        assessing the accounting principles used and significant estimates made by
        management, as well as evaluating the overall financial statement presentation.
  In
        our
        opinion, these consolidated financial statements present fairly, in all material
        respects, the financial position of the Company as at December 31, 2006 and
        2005
        and the results of its operations and its cash flows for each of the years
        in
        the three-year period ended December 31, 2006 in accordance with Canadian
        generally accepted accounting principles.
  
  KPMG
        LLP
 Chartered
        Accountants
  Toronto,
        Canada,
 February
        27, 2007.
  
 2
  
  Consolidated
        Balance Sheets
 (expressed
        in thousands of Canadian dollars)
 December
                31
              
              **2006**
              
              2005**ASSETS****Current
                  Assets**Cash
              
              **$**
              **3,153**
              
              $
              15,031Concentrate
                  awaiting settlement, net -Note
                  3
              
              
              **82,050**
              
              
              37,453Taxes
                  recoverable
              
              
              **145**
              
              
              -Inventories
                  -Note
                  4
              
              
              **14,164**
              
              
              8,599Crushed
                  and broken ore stockpiles
              
              
              **7,134**
              
              
              7,267Other
                  assets
              
              
              **2,602**
              
              
              2,344**109,248**
              
              
              70,694Mining
                  interests, net -Note 5
              
              
              **146,617**
              
              
              159,523Mine
                  restoration deposit -Note
                  6
              
              
              **8,041**
              
              
              7,247Crushed
                  and broken ore stockpiles
              
              
              **289**
              
              
              239Deferred
                  financing costs -Note
                  7
              
              
              **962**
              
              
              654
 **$**
              **265,157**
              
              $
              238,357**LIABILITIES
                  AND SHAREHOLDERS’ EQUITY****Current
                  Liabilities**Accounts
                  payable and accrued liabilities
              
              **$**
              **21,526**
              
              $
              16,392Taxes
                  payable
              
              
              **-**
              
              
              386Future
                  mining tax liability -Note
                  18
              
              
              **149**
              
              
              -Current
                  portion of obligations under capital leases -Note
                  8
              
              
              **2,104**
              
              
              2,323Current
                  portion of convertible notes payable -Note
                  9
              
              
              **22,148**
              
              
              -Current
                  portion of long-term debt -Note
                  10
              
              
              **6,662**
              
              
              6,664Kaiser-Francis
                  credit facility -Note
                  11
              
              
              **5,827**
              
              
              13,407
 **58,416**
                
                
                39,172Mine
                    restoration obligation
                
                
                **8,211**
                
                
                7,894Obligations
                    under capital leases -Note
                    8
                
                
                **4,111**
                
                
                6,218Convertible
                    notes payable -Note
                    9
                
                
                **23,062**
                
                
                -Long-term
                    debt -Note
                    10
                
                
                **10,992**
                
                
                17,660Future
                    mining tax liability -Note
                    18
                
                
                **381**
                
                
                202**105,173**
                
                
                71,146**SHAREHOLDERS’
                    EQUITY**Common
                    share capital and purchase warrants -Note
                    13
                
                
                **339,743**
                
                
                325,592Equity
                    component of convertible notes payable, net of issue costs -Note 9
                
                
                **12,336**
                
                
                -Contributed
                    surplus
                
                
                **1,269**
                
                
                874Deficit
                
                
                **(193,364**
                **)**
                
                (159,255
                )Total
                    shareholders’ equity
                
                
                **159,984**
                
                
                167,211**$**
                **265,157**
                
                $
                238,357
  Commitments
                  -Notes
                  1 and 15Contingencies
                  -Note
                  6 and 17Subsequent
                  Events -Note
                  20See
                  accompanying notes to the consolidated financial statementsOn
                  Behalf of the Board
  André J. Douchane
              
              Greg Van StaverenDirector
              
              Director
  
 3
  
  Consolidated
        Statements of Loss and Deficit
 (expressed
        in thousands of Canadian dollars, except share and per share amounts )
 Year
                ended December 31
              
              
              **2006**
              
              
              2005
              
              
              2004**Revenue
                  from metal sales**-Note
                  16
              
              **$**
              **159,200**
              
              $
              92,606
              
              $
              185,204**Operating
                  expenses**Production
                  costs, excluding amortization andasset
                  retirement costs
              
              
              **112,458**
              
              
              99,322
              
              
              102,936Smelter
                  treatment, refining and freight costs
              
              
              **15,438**
              
              
              15,777
              
              
              23,602Insurance
                  recovery -Note
                  17(b)
              
              
              **-**
              
              
              -
              
              
              (7,148
              )Amortization
                  -Note
                  5(b)
              
              
              **30,103**
              
              
              18,297
              
              
              36,296Administrative
              
              
              **6,734**
              
              
              6,616
              
              
              5,557Exploration
              
              
              **11,831**
              
              
              7,927
              
              
              2,479Loss
                  on disposal of equipment
              
              
              **194**
              
              
              -
              
              
              277Asset
                  retirement costs
              
              
              **554**
              
              
              476
              
              
              905Write-down
                  of mining interests -Note
                  5(c)
              
              
              **-**
              
              
              -
              
              
              108,000Total
                  operating expenses
              
              
              **177,312**
              
              
              148,415
              
              
              272,904
 **Loss
                  from mining operations**
              
              
              **(18,112**
              **)**
              
              (55,809
              )
              
              (87,700
              )**Other
                  income (expenses)**Interest
                  on long-term debt, capital leases and convertiblenotes
                  payable -Notes
                  8,9,10 and 11
              
              
              **(5,009**
              **)**
              
              (2,509
              )
              
              (1,756
              )Write-off
                  of deferred financing costs
              
              
              **(504**
              **)**
              
              -
              
              
              (788
              )Foreign
                  exchange gain (loss)
              
              
              **(1,759**
              **)**
              
              268
              
              
              (340
              )Interest
                  income
              
              
              **801**
              
              
              1,641
              
              
              494Amortization
                  of deferred financing costs
              
              
              **(586**
              **)**
              
              (43
              )
              
              (414
              )Accretion
                  expense relating to convertible notes payable -Note
                  9
              
              
              **(10,090**
              **)**
              
              -
              
              
              -Derivative
                  income
              
              
              **-**
              
              
              -
              
              
              213Interest
                  expense
              
              
              **(259**
              **)**
              
              (41
              )
              
              (29
              )
 Total
                  other income (expenses)
              
              
              **(17,406**
              **)**
              
              (684
              )
              
              (2,620
              )**Loss
                  before income taxes**
              
              
              **(35,518**
              **)**
              
              (56,493
              )
              
              (90,320
              )Income
                  tax expense (recovery) -Note
                  18
              
              
              **(1,409**
              **)**
              
              (2,882
              )
              
              1,790**Net
                  loss for the year**
              
              
              **(34,109**
              **)**
              
              (53,611
              )
              
              (92,110
              )Deficit,
                  beginning of year
              
              
              **(159,255**
              **)**
              
              (105,644
              )
              
              (13,534
              )Deficit,
                  end of year
              
              **$**
              **(193,364**
              **)**
              $
              (159,255
              )
              $
              (105,644
              )
  Net
                  loss per shareBasic
              
              **$**
              **(0.65**
              **)**
              $
              (1.03
              )
              $
              (1.79
              )Diluted
                  -Note
                  13(f)
              
              **$**
              **(0.65**
              **)**
              $
              (1.03
              )
              $
              (1.79
              )Weighted
                  average number of shares outstanding - basic
              
              
              **52,562,939**
              
              
              52,006,548
              
              
              51,379,542Weighted
                  average number of sharesoutstanding
                  - diluted -Note
                  13(f)
              
              
              **52,562,939**
              
              
              52,006,548
              
              
              51,379,542
 
 See
        accompanying notes to the consolidated financial statements
  
 4
  
  Consolidated
        Statements of Cash Flows
 (expressed
        in thousands of Canadian dollars)
 Year
                  ended December 31
              
              **2006**
              
              2005
              
              2004**Cash
                  provided by (used in)****Operations**Net
                  loss for the year
              
              **$**
              **(34,109**
              **)**
              $
              (53,611
              )
              $
              (92,110
              )Operating
                  items not involving cashAccretion
                  expense relating to convertible notes payable
              
              
              **10,090**
              
              
              -
              
              
              -Amortization
              
              
              **30,103**
              
              
              18,297
              
              
              36,296Amortization
                  of deferred financing costs
              
              
              **586**
              
              
              43
              
              
              414Accrued
                  interest on convertible notes
              
              
              **1,974**
              
              
              -
              
              
              -Accrued
                  interest on mine restoration deposit
              
              
              **(194**
              **)**
              
              (74
              )
              
              (40
              )Unrealized
                  foreign exchange gain
              
              
              **(419**
              **)**
              
              (1,433
              )
              
              (3,687
              )Loss
                  on disposal of equipment
              
              
              **194**
              
              
              -
              
              
              277Asset
                  retirement costs
              
              
              **554**
              
              
              476
              
              
              905Future
                  income tax expense (recovery) -Note
                  18
              
              
              **(739**
              **)**
              
              (3,286
              )
              
              643Write-off
                  of deferred financing costs
              
              
              **504**
              
              
              -
              
              
              788Write-down
                  of mining interests -Note
                  5(c)
              
              
              **-**
              
              
              -
              
              
              108,000Stock
                  based compensation and employee benefits
              
              
              **1,771**
              
              
              1,728
              
              
              573
 **10,315**
              
              
              (37,860
              )
              
              52,059Changes
                  in non-cash working capital -Note
                  19(a)
              
              
              **(44,104**
              **)**
              
              29,587
              
              
              29,731**(33,789**
              **)**
              
              (8,273
              )
              
              81,790**Financing
                  Activities**Issuance
                  of convertible notes
              
              
              **41,037**
              
              
              -
              
              
              -Increase
                  in long-term debt and credit facility
              
              
              **8,111**
              
              
              -
              
              
              36,809Deferred financing
                  costs
              
              
              **(2,364**
              **)**
              
              -
              
              
              (504
              )Issuance
                  of common shares
              
              
              **3,955**
              
              
              3,200
              
              
              9,415Repayment
                  of long-term debt
              
              
              **(6,566**
              **)**
              
              (6,798
              )
              
              (44,290
              )Repayment
                  of obligations under capital leases
              
              
              **(2,278**
              **)**
              
              (2,253
              )
              
              (1,751
              )Mine
                  restoration deposit
              
              
              **(600**
              **)**
              
              (1,200
              )
              
              (1,200
              )**41,295**
              
              
              (7,051
              )
              
              (1,521
              )
 **Investing
                  Activities**Additions
                  to mining interests
              
              
              **(19,384**
              **)**
              
              (35,415
              )
              
              (28,728
              )Proceeds
                  on disposal of mining interests
              
              
              **-**
              
              
              15
              
              
              451Restricted
                  cash equivalents
              
              
              **-**
              
              
              -
              
              
              1,813**(19,384**
              **)**
              
              (35,400
              )
              
              (26,464
              )
 Increase
                  (decrease) in cash and cash equivalents
              
              
              **(11,878**
              **)**
              
              (50,724
              )
              
              53,805Cash
                  and cash equivalents, beginning of year
              
              
              **15,031**
              
              
              65,755
              
              
              11,950Cash
                  and cash equivalents, end of year
              
              **$**
              **3,153**
              
              $
              15,031
              
              $
              65,755
 
 Supplementary
        information - Note 19(b), (c) (d) and (e)
 See
        accompanying notes to the consolidated financial statements
  
 5
  
  Notes
        to
        the Consolidated Financial Statements
 **for
        the years ended December 31, 2006, 2005 and 2004**
 (expressed
        in thousands of Canadian dollars, except share, per share amounts and metal
        prices)
  **1.
        NATURE OF OPERATIONS**
 North
        American Palladium Ltd. (“NAP” or “the Company”) is a Canadian company in the
        business of exploring and mining Platinum Group Metals (“PGMs”) and certain base
        and precious metals. Its principal asset is the Lac des Iles mine located
        in the
        Thunder Bay District in Ontario. The Company also has a number of base metal
        exploration projects located in Canada and an advanced PGM exploration project
        located in Finland in which it is earning an interest in under an agreement
        dated March 24, 2006. The Company operates in one operating segment, mining.
  The
        Company’s financial position and operating results are directly affected by the
        market price of the PGMs in relation to the Company’s production costs. The
        prices of PGMs (palladium, platinum) and by-product metals (gold, copper
        and
        nickel) fluctuate widely and are affected by numerous factors beyond the
        Company’s control.
  **Life-of-Mine
        Plan Review and Measurement Uncertainty of Mining Interests**
 During
        the first quarter of 2006, the ultimate pit design implemented in 2004 was
        changed to an interim pit design that addressed previously disclosed south
        pit
        wall instability issues. The Company engaged an independent geotechnical
        consultant to review the slope stability issues and their recommendations
        have
        been used in designing a reconfigured open pit mining plan. As a result of
        these
        events the Company completed a detailed review of its life-of-mine operating
        plan for the Lac des Iles mine, the Company’s only operating mine, revised its
        mine plan and compared the carrying value of the Company’s mining interests to
        the estimated recoverability, based upon this revised mine plan and the updated
        reserve reports received from independent third party consultants. Based
        on this
        review the Company’s management believes an impairment charge and a
        corresponding reduction in the carrying value of its mining interests is
        not
        required.
  **Arctic
        Platinum Project**
 On
        March
        24, 2006, the Company entered into an agreement with Gold Fields Limited
        to
        further explore and develop a mining operation at the Arctic Platinum Project
        (“APP”) located in Finland. The APP includes several advanced stage PGM
        Projects. The Company has been granted an option to earn up to a 50% interest
        and, in certain circumstances, a 60% interest in APP, in which event a joint
        venture will be formed and the Company will become the project operator.
        In
        order to exercise the option, the Company must spend US$12.5 million, complete
        a
        feasibility study and make a production decision as well as pay Gold Fields
        US$36 million or US$45 million to earn a 50% or 60% interest, respectively
        through the issuance of the Company’s common shares (approximately 7.3 million
        or 9.2 million shares as the case maybe) on or before August 31, 2008. As
        at
        December 31, 2006, the Company has incurred $6,824 (US$6,019) in expenditures
        on
        the APP and these costs have been charged to exploration expense.
  **Shebandowan
        Project**
 On
        December 3, 2003, the Company entered into an option and joint venture agreement
        with Inco Limited on the Haines-Conacher property which surrounds the past
        producing Shebandowan mine. The agreement was subsequently amended March
        31,
        2006 to include the mine.
  The
        nickel, copper PGM Shebandowan Project is located approximately 100 km southwest
        of the Lac des Iles mine. Successive diamond drilling programs in 2005 and
        2006
        warrant follow up on three relatively shallow mineralized zones known as
        the
        West, Road and “D” zones.
  **2.
        BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
 These
        consolidated financial statements have been prepared in accordance with Canadian
        generally accepted accounting principles. All amounts are in Canadian dollars
        unless otherwise noted. The more significant accounting policies are summarized
        as follows:
  
 6
  
  **Basis
        of Consolidation**
 These
        consolidated financial statements include the accounts of the Company and
        its
        wholly-owned subsidiary, Lac des Iles Mines Ltd. (“LDI”), North American
        Palladium Finland Ltd. (“NAPFL”), and North American Palladium Arctic Services
        Ltd. (“NAPFS”). All inter-company balances and transactions have been
        eliminated.
  **Revenue
        and Concentrate Awaiting Settlement**
 Revenue
        from the sale of palladium and by-product metals is recognized net of royalties
        upon the delivery of concentrate to the smelter, which is when title transfers
        and the rights and obligations of ownership pass. The Company’s metals are sold
        under contracts that provide for final prices that are determined by quoted
        market prices in a period subsequent to the date of sale. Variations from
        the
        provisionally priced sales are recognized as revenue adjustments as they
        occur
        until the price is finalized. Provisional pricing is based upon market
        prices in the month of recognition. Concentrate awaiting settlement at the
        smelter is net of estimated treatment and refining costs.
  Although
        the Company sold its metals during 2006 to a limited number of customers,
        the
        Company is not economically dependent upon them as there are other markets
        throughout the world for the Company’s metals.
  **Derivative
        Financial Instruments**
 From
        time
        to time the Company enters into forward commodity sales contracts to hedge
        the
        effect of changes in the prices of metals it produces on the Company’s revenues.
        Gains and losses on derivative financial instruments used to mitigate metal
        price risk are recognized in revenue from metal sales over the term of the
        hedging contract. The Company had no outstanding contracts as at December
        31,
        2006.
  From
        time
        to time the Company enters into foreign exchange forward sales contracts
        to
        manage the effect of fluctuations in the value of committed U.S. dollar
        denominated revenues. For those forward exchange contracts designated by
        the
        Company as hedges, the related revenue is recorded at the forward contract
        rate.
        Those foreign exchange forward sales contracts not designated by the Company
        as
        hedges are marked-to-market as at the balance sheet date and the resultant
        gains
        or losses are included in earnings for the period. The fair value of the
        Company’s derivative financial instruments is determined based on forward prices
        supplied by knowledgeable, independent third parties. The Company had no
        outstanding contracts as at December 31, 2006.
  The
        Company does not hold financial instruments or derivative financial instruments
        for trading purposes. Cash flows arising in respect of hedging transactions
        are
        recognized under cash flows from operating activities.
  **Concentrate,
        Crushed and Broken Ore Stockpiles and Supplies Inventories**
 Concentrate
        and crushed and broken ore stockpiles are valued at the lower of average
        production cost (including an allocation of the amortization of production
        related assets) and net realizable value. Crushed and broken ore stockpiles
        represent coarse ore that has been extracted from the mine and is available
        for
        further processing. Stockpile tonnages are verified by periodic surveys.
        The
        amount of stockpiled ore that is not expected to be processed within one
        year is
        shown as a long-term asset. Supplies inventory is valued at the lower of
        average
        direct acquisition cost and replacement cost.
  **Mining
        Interests**
 Plant
        and
        equipment are recorded at cost with amortization generally provided either
        on
        the unit-of-production method over the proven and probable reserves to which
        they relate or on a straight-line basis over their estimated useful lives,
        ranging from three to seven years. The Company capitalizes interest on major
        projects where direct indebtedness has occurred. During 2006 $188 of interest
        was capitalized (2005 - $307).
  The
        Company leases certain equipment under capital leases. These leases are
        capitalized based on the lower of fair market value and the present value
        of
        future minimum lease payments. The corresponding liabilities are recorded
        as
        obligations under capital leases. This equipment is being amortized on the
        same
        basis as described above.
  
 7
  
  Mining
        leases and claims and royalty interests are recorded at cost and are amortized
        on the unit-of-production method over the proven and probable reserves.
  Exploration
        costs relating to properties are charged to earnings in the year in which
        they
        are incurred. When it is determined that a mining property can be economically
        developed as a result of established proven and probable reserves, future
        development and exploration expenditures are capitalized. Determination as
        to
        reserve potential is based on the results of feasibility studies, which indicate
        whether production from a property is economically feasible. Upon commencement
        of commercial production of a development project these costs are amortized
        using the unit-of-production method over the proven and probable reserves.
        Capitalized exploration costs, net of salvage values, relating to a property
        that is later abandoned or considered uneconomic for the foreseeable future,
        are
        written off in the period the decision is made.
  **Impairment
        of Long-lived Assets**
 Each
        year, the Company reviews mining plans for the remaining life of each property.
        Significant changes in the mine plan can occur as a result of mining experience,
        new discoveries, changes in mining methods and rates, process changes,
        investments in new equipment and technology and other factors. Based on year-end
        ore reserves and the current mine plan, the Company reviews annually its
        accounting estimates and makes adjustments accordingly.
  The
        Company assesses long-lived assets for impairment whenever events or changes
        in
        circumstances indicate the carrying amount of an asset may not be recoverable.
        When the carrying value of a long-lived asset is less than its net recoverable
        value as determined on an undiscounted basis, an impairment loss is recognized
        to the extent that its fair value, measured as the discounted cash flows
        over
        the life of the asset is less than the carrying value. Future cash flows
        are
        estimated based on quantities of recoverable minerals, expected palladium
        and
        other commodity prices and expected foreign exchange rates (considering current,
        historical and expected future prices and foreign exchange rates and related
        factors), production levels and cash costs of production and capital and
        reclamation expenditures, all based on detailed life-of-mine plans and
        projections. The term “recoverable minerals” refers to the estimated amount of
        palladium and other commodities that will be obtained from proven and probable
        reserves after taking into account losses during mining, ore processing and
        concentrate treatment. Assumptions underlying future cash flow estimates
        are
        subject to risk and uncertainty. Any differences between significant assumptions
        and market conditions such as metal prices, exchange rates, recoverable metal,
        and/or the Company’s operating performance could have a material effect on the
        Company’s ability to recover the carrying amounts of its long-lived assets
        resulting in possible additional impairment charges (note 5(c)).
  **Asset
        Retirement Obligations**
 Asset
        retirement obligations are recognized when incurred and recorded as liabilities
        at fair value. The amount of the liability is subject to re-measurement at
        each
        reporting period. The liability is accreted over time through periodic charges
        to earnings. In addition, the asset retirement obligation is capitalized
        as part
        of mining interests and amortized over the estimated life of the mine. Total
        undiscounted cash flows required to settle the obligations are estimated
        to be
        approximately $7.8 million, the majority of which is to be paid at the end
        of
        the mine life, which is currently expected to end in 2010. A credit adjusted
        risk-free rate of 4% has been utilized to determine the obligation recorded
        on
        the balance sheet. The estimated asset retirement obligation may change
        materially based on future changes in operations, costs of reclamation and
        closure activities, and regulatory requirements.
  The
        following is a reconciliation of the changes in the asset retirement obligation
        during the year:
  **2006**
              
              2005Balance,
                  beginning of the year
              
              **$**
              **7,894**
              
              $
              7,592Accretion
                  expense
              
              
              **317**
              
              
              302Balance
                  at the end of year
              
              **$**
              **8,211**
              
              $
              7,894
 
 
 8
  
  **Stock
          Based Compensation Plans**
 The
        Company has a stock-based compensation plan which is described in note 13
        (e)
        and a Restricted Share Unit Plan (“RSU”) which is described in note 13 (g). The
        Company recognizes as an expense the cost of stock-based compensation based
        on
        the estimated fair value of new stock options granted to employees and
        directors. The fair value of each RSU, being the fair market value of the
        Company’s common shares at the grant date, is recorded as a liability on the
        Company’s consolidated balance sheet over the vesting period. The value of the
        RSU liability is adjusted to reflect changes in the market value of the
        Company’s common shares at each period end.
  **Translation
        of Foreign Currency**
 The
        reporting and functional currency of the Company is the Canadian dollar.
        Accordingly, the Company translates monetary assets and liabilities denominated
        in foreign currency at the rate of exchange prevailing at the consolidated
        balance sheet dates, non-monetary assets and liabilities denominated in foreign
        currency at the rate in effect at the date the transaction occurred and revenues
        and expenses denominated in foreign currency at the exchange rate in effect
        during the applicable accounting period. All resulting foreign exchange gains
        and losses are recorded in the consolidated statements of loss and deficit.
  **Income
        Taxes**
 The
        Company follows the asset and liability method of accounting for income taxes.
        Under this method, future tax assets and liabilities are determined based
        on
        differences between the financial reporting and tax bases of assets and
        liabilities and are measured using the substantively enacted tax rates and
        laws
        that will be in effect when the differences are expected to reverse. The
        effect
        on future tax liabilities and assets of a change in tax rates is recognized
        in
        income in the period that the change occurs. The Company provides a valuation
        allowance for future tax assets when it is more likely than not that some
        portion or all of the future tax assets will not be realized.
  **Cash
        and Cash Equivalents**
 Cash
        and
        cash equivalents includes cash on account less outstanding cheques, demand
        deposits and short-term guaranteed investments with original maturities of
        three
        months or less and are stated at cost.
  **Deferred
        Financing Costs**
 Deferred
        financing costs represent the costs of negotiating and securing the Company’s
        long-term debt facilities and costs incurred in connection with the filing
        of a
        shelf prospectus. The amortization of the costs of securing the long-term
        debt
        facilities is included in amortization expense on a straight-line basis over
        the
        term of the debt facility. The equity financing was not completed before
        the
        expiration of the then outstanding shelf prospectus and as a result, deferred
        financing costs in the amount of $504 related to the shelf prospectus were
        expensed during the year ended December 31, 2006.
  **Basic
        and Diluted Loss Per Share**
 Basic
        loss per common share is computed by dividing the loss for the period by
        the
        weighted average number of common shares outstanding during the reporting
        period. Diluted loss per common share is computed using the treasury stock
        method whereby the weighted average number of shares outstanding is increased
        to
        include additional common shares from the assumed exercise of stock options,
        convertible notes and common share purchase warrants (equity instruments),
        if
        dilutive. The number of additional common shares is calculated by assuming
        that
        outstanding equity instruments were exercised and that proceeds from such
        exercises were used to acquire shares of common stock at the average market
        price during the reporting period. These common equivalent shares are not
        included in the calculation of the weighted average number of shares outstanding
        for diluted loss per common share when the effect would be anti-dilutive.
  **Flow-through
        Shares**
 The
        Company finances a portion of its exploration activities through the issue
        of
        flow-through shares. The Company renounces the deductions to investors and
        accordingly records share issue costs related to the future tax liability
        of the
        temporary difference arising from the renounciation. As a result, share capital
        is reduced and future income tax liabilities are increased by the estimated
        tax
        benefits when renounced by the Company to the investors, except to the extent
        that the Company has unused tax benefits on loss carryforwards and tax pools
        in
        excess of book value available for deduction against which a valuation allowance
        has been provided. In these circumstances, the future tax liability reduces
        the
        valuation allowance, if any, and the reduction is recognized in earnings.
  
 9
  
  **Use
        of Estimates**
 The
        preparation of financial statements requires management to make estimates
        and
        assumptions that affect the reported amount of assets and liabilities, and
        disclosure of contingent assets and liabilities at the date of the financial
        statements and the reported amounts of revenue and expenses during the year.
        Significant estimates and assumptions relate to recoverability of mining
        operations and mineral exploration properties. While management believes
        that
        these estimates and assumptions are reasonable, actual results could vary
        significantly.
  **3.
        CONCENTRATE AWAITING SETTLEMENT**
 Concentrate
        awaiting settlement is comprised of:
  **2006**
              
              2005Concentrate
                  awaiting settlement, gross
              
              **$**
              **88,034**
              
              $
              41,819Refining
                  and smelter treatment charges
              
              
              **(5,984**
              **)**
              
              (4,366
              )Concentrate
                  awaiting settlement, net
              
              **$**
              **82,050**
              
              $
              37,453
 
 The
        gross
        value of concentrate awaiting settlement represents the value of all PGMs
        and
        base metals from production shipped to and received by the third-party smelters
        between June and December 2006, including 129,496 ounces of palladium (2005
        -
        including 65,905 ounces of palladium).
  All
        of
        the concentrate awaiting settlement is from two domestic customers at December
        31, 2006 (2005 -
        two
        domestic customers). No reserves for doubtful accounts have been established. In
        the opinion of management, full realization will occur on all such receivables.
  **4.
        INVENTORIES**
 Inventories
        consist of the following:
  **2006**
              
              2005Concentrate
              
              **$**
              **3,782**
              
              $
              502Supplies
              
              
              **10,382**
              
              
              8,097**$**
              **14,164**
              
              $
              8,599
  **5** **MINING
          INTERESTS**
 (a)
          Mining interests are comprised of the following:
 **2006**
                  
                  
                  2005Plant
                      and equipment, at cost
                  
                  **$**
                  **362,151**
                  
                  $
                  355,532Underground
                      mine development, at cost
                  
                  
                  **43,015**
                  
                  
                  30,784Accumulated
                      amortization and impairment charges
                  
                  
                  **277,397**
                  
                  
                  249,043**127,769**
                  
                  
                  137,273Equipment
                      under capital lease, at cost
                  
                  
                  **14,076**
                  
                  
                  14,076Accumulated
                      amortization and impairment charges
                  
                  
                  **3,991**
                  
                  
                  2,245**10,085**
                  
                  
                  11,831Mining
                      leases and claims, royalty interest, and development, at
                      cost
                  
                  
                  **82,561**
                  
                  
                  82,561Accumulated
                      amortization and impairment charges
                  
                  
                  **73,798**
                  
                  
                  72,142**8,763**
                  
                  
                  10,419Mining
                      interests, net
                  
                  $
                  **146,617**
                  
                  $
                  159,523
 
 10
  
 
 (b)
        Amortization expense is comprised of:
  **2006**
              
              2005
              
              2004Capital
                  assets (including plant and equipment,and
                  equipment under capital lease)
              
              **$**
              **28,422**
              
              $
              17,384
              
              $
              32,149Mining
                  leases and claims, royalty interest,exploration
                  and development costs
              
              
              **1,681**
              
              
              913
              
              
              4,147**$**
              **30,103**
              
              $
              18,297
              
              $
              36,296
 
 (c)
              During
                  the fourth quarters of 2006 and 2005, the Company tested its long-lived
                  assets, including tangible mineral interests and plant and equipment
                  for
                  impairment, and reflected an impairment charge of nil in 2006 (2005
                  -
                  nil).
  In
          accordance with the Company’s accounting policy, the Company recorded the 2004
          impairment charge of $108,000 as the difference between the carrying value
          of
          the mineral interests and the fair value of the mineral interests measured
          using
          a discounted cash flow analysis over the remaining life of LDI. The key
          assumptions utilized by the Company in its life-of-mine discounted cash
          flow
          model were: expected long-term average price of palladium of US$275 per
          ounce,
          gold of US$375 per ounce; platinum of US$650 per ounce, copper of US$0.90
          per
          pound and nickel of US$3.50 per pound; life-of-mine discount rate of 5%;
          expected additional capital expenditures of $56,000; and an average life-of-mine
          foreign exchange rate of Cdn$1.34 to US$1.00.
 (d)
              Mining
                  interests in the amount of nil (2005 - $30,784) are not subject
                  to
                  amortization as these costs relate to underground mine development
                  work
                  currently in progress.
  **6.
        MINE RESTORATION DEPOSIT**
 The
        Company, in conjunction with the Ontario Ministry of Northern Development
        and
        Mines (the “Ministry”), has established a trust fund (the “Fund”) pursuant to
        the Company’s mine closure plan for eventual clean-up and restoration of the
        mine site. The mine closure plan calls for a total amount of $7,802 to be
        accumulated in the Fund.
  Commencing
        in February 2001, the Fund, controlled by the Ministry, started to accumulate
        through monthly deposits of $100. At December 31, 2006, the Company had $8,041
        (2005 - $7,247) on deposit with the Ministry including accrued interest of
        $511.
        All current amounts required have been contributed as at December 31, 2006.
        The
        funds on deposit bear interest at current short-term deposit rates and will
        be
        returned to the Company once the mine closure is completed. The estimated
        asset
        retirement obligation may change materially based on future changes in
        operations, costs of reclamation and closure activities, and regulatory
        requirements.
  **7.
        DEFERRED FINANCING COSTS**
  **2006**
              
              2005Financing
                  costs
              
              **$**
              **1,610**
              
              $
              716Accumulated
                  amortization
              
              
              **648**
              
              
              62**$**
              **962**
              
              $
              654
 
 
 11
 8.
          OBLIGATIONS UNDER CAPITAL LEASES
 The
          following is a schedule of future minimum lease payments under capital
          leases
          together with the present value of the net minimum lease payments:
  **2006**
                
                20052006
                
                **$**
                **-**
                
                $
                2,7092007
                
                
                **2,422**
                
                
                2,3802008
                
                
                **2,166**
                
                
                2,1382009
                
                
                **1,775**
                
                
                1,7612010
                
                
                **473**
                
                
                472Total
                    minimum lease payments
                
                
                **6,836**
                
                
                9,460Amounts
                    representing interest at rates from 3.5% - 8.3%
                
                
                **621**
                
                
                919Present
                    value of minimum lease payments
                
                
                **6,215**
                
                
                8,541Less
                    current portion
                
                
                **2,104**
                
                
                2,323**$**
                **4,111**
                
                $
                6,218**9.
                    CONVERTIBLE NOTES PAYABLE**2006Series
                    I convertible notes (principal amount US$35 million,maturing
                    August 1, 2008)
                
                
                
                
                $
                32,048Series
                    II convertible note (principal amount US$13.5 million,maturing
                    December 1, 2008)
                
                
                
                
                
                13,16245,210Less
                    current portion
                
                
                
                
                
                (22,148
                )$
                23,062
 
 On
          March
          29, 2006, the Company issued US$35,000 (Cdn$41,037) aggregate principal
          amount
          of Series I convertible notes (the “Series I Notes”) due August 1, 2008 through
          a private placement of convertible notes and common share purchase warrants.
          The
          offering (the “Offering”) consisted of up to US$58,500 principal amount of notes
          which were issuable in three tranches. The Offering was to Kaiser-Francis
          Oil
          Company (Kaiser-Francis) and an institutional investor (the “Purchasers”). The
          Offering is governed by a securities purchase agreement dated March 24,
          2006
          (the “SPA”) between the Company and the Purchasers.
  The
          Series I Notes are convertible into 2,873,563 common shares of the Company
          at
          any time by the holder at the initial conversion price of US$12.18 per
          share.
          Warrants exercisable to purchase 1,436,782 common shares were issued with
          the
          Series I Notes, each warrant being exercisable to purchase one common share
          at
          an initial exercise price of US$13.48 until March 29, 2010.
  The
          Company, at its option, had the right to sell to Kaiser-Francis a Series
          II Note
          (a second tranche) in the principal amount of up to US$13,500 on or before
          June
          30, 2006, which would be used to repay the loan under the existing
          Kaiser-Francis credit facility (refer to note 11). On June 23, 2006, the
          Company
          exercised this right and issued to Kaiser-Francis a Series II Note in the
          principal amount of US$13,500 (Cdn$15,176), due December 1, 2008. The Series
          II
          Note is convertible into 1,108,374 common shares of the Company at any
          time by
          the holder at the initial conversion price of US$12.18 per share. Warrants
          exercisable to purchase 554,187 common shares were issued with the Series
          II
          Notes, with each warrant being exercisable to purchase one common share
          at an
          initial exercise price of US$13.48 until June 23, 2010.
  The
          Purchasers had the option to acquire an additional US$10,000 principal
          amount of
          notes (a third tranche) on or before December 31, 2006. The Purchasers
          elected
          not to exercise this option.
  The
          Series I Notes and II Note bear interest at a rate of 6.5% per annum payable
          bi-monthly, commencing on June 1, 2006 and August 1, 2006, respectively.
          The
          Series I Notes and II Note are repayable in nine equal installments commencing
          April 1, 2007 and August 1, 2007, respectively. The interest payments and/or
          repayment amounts may be paid to each Purchaser, at the Purchaser’s option, in
          any combination of cash and/or common shares. If common shares are issued
          for
          interest payments or in repayment of the convertible notes they will be
          issued
          at a 10% discount from the weighted average trading price of the common
          shares
          on the AMEX for the five consecutive trading days immediately prior to
          applicable payment date. The Company has the right to defer any principal
          repayment in cash until a later principal repayment date. There is no limit
          on
          the length of the deferral, other than it cannot be deferred later than
          the
          final maturity date. The Company must give five days notice of its intention
          to
          defer payment.
  
 
 12
  
  Commencing
          June 29, 2007 for Series I and September 23, 2007 for Series II, if the
          weighted
          average trading price of the common shares for each of any twenty-five
          consecutive trading days is 150% or more of the conversion price, the Company
          will have the right to force the Purchasers to convert all or any of the
          outstanding principal amount of the convertible notes at the conversion
          price.
  The
            convertible notes contain customary covenants, including restrictions
            on the
            Company incurring debt, payment of dividends or obligations for or involving
            the
            payment of money in excess of certain restricted amounts. The convertible
            notes
            are unsecured but contain customary anti-dilution protection as well
            as
            adjustments in the event that the Company issues common shares or securities
            convertible into common shares at a purchase price per common share less
            than
            the conversion price. The warrants contain similar anti-dilution
            protection.
  Under
          Canadian GAAP, the components of the convertible notes must be bifurcated
          and
          accounted for separately as debt and equity instruments. The warrants are
          separable from the notes and are accounted for as an equity instrument.
          The
          Series I proceeds received were allocated to the debt and equity components
          of
          the notes and to the initial warrants on a relative fair value basis as
          follows:
          US$20,558 to the debt, US$8,808 to the equity component and US$5,634 to
          the
          warrants. The Series II Note proceeds were allocated as follows: US$9,578
          to the
          debt, US$2,312 to the equity component and US$1,610 to the warrants. In
          addition, a liability (the “Equity Premium”) was recognized for the holders’
option to receive common shares, in lieu of cash, at a 10% discount to
          the five
          day weighted trading price, as described above, for interest and principal
          payments. The Company accretes the carrying value of the convertible notes
          and
          the Equity Premium such that at each installment payment date, the carrying
          value of the convertible notes and the Equity Premium will be equal to
          the face
          value of the convertible notes and the liability related to the Equity
          Premium.
          The Company recorded accretion expense of $10,090 during 2006 of which
          $2,523
          represented the accretion relating to the Equity Premium which was included
          in
          the carrying value of the convertible notes payable as at December 31,
          2006.
  The
          fair
          value of the debt was determined based on the future payments of principal
          and
          interest for a debt instrument of comparable maturity and credit quality,
          excluding any conversion option by the holder. The Series I Notes carry
          an
          effective interest of 42%. The Series II Note carries an effective interest
          rate
          of 28%.
  The
          conversion option or equity component of the convertible notes was valued
          using
          a Binomial model. The fair value of the warrants was determined based on
          the
          Black-Scholes option pricing model. The models used in the valuation of
          the
          components of the convertible debt contain certain subjective assumptions,
          changes of which can cause significant variation in the estimated fair
          value of
          the debt and equity components of the convertible notes.
  The
          issue
          costs of $2,364 have been allocated pro-rata to the debt ($1,398) and equity
          components ($589) of the Series I Notes and II Note and to the associated
          warrants ($377) on a relative fair value basis. The financing costs related
          to
          the debt components are being amortized on an effective yield basis over
          the
          term of the convertible notes.
  
 13
  
  **10.
          LONG-TERM DEBT**
  **2006**
                
                2005Equipment
                    finance company credit facility consisting of Cdn$6,000 andUS$10,000
                    (2005 - Cdn$8,000 and US$14,000) loans
                
                **$**
                **17,654**
                
                $
                24,324Less
                    current portion
                
                
                **6,662**
                
                
                6,664**$**
                **10,992**
                
                $
                17,660
 
 On
          June
          28, 2004, the Company entered into a US$20,000 and Cdn$10,000 senior credit
          facility with an equipment finance company. The US$20,000 credit facility
          is
          repayable in equal quarterly installments of US$1,000 commencing on September
          30, 2004 and has a final maturity on June 30, 2009. The Cdn$10,000 credit
          facility is repayable in equal quarterly installments of Cdn$500 commencing
          February 24, 2005 and has a final maturity of November 24, 2009. The credit
          facility has an interest margin of 2.5% over 30-day LIBOR rate. In return
          for
          granting the loan, the lender received a first priority security in all
          of the
          Company’s existing and future assets excluding its production leases and claims.
          The credit facility allows in certain circumstances, full repayment of
          outstanding loans at any time during the term of the facility.
  **11.
          KAISER-FRANCIS CREDIT FACILITY**
 At
          the
          time the Company entered into its senior credit facility (see Note 10),
          certain
          terms under the US$20,000 non-revolving credit facility with Kaiser-Francis
          Oil
          Company (“Kaiser-Francis”) were amended. The final maturity date was extended to
          June 30, 2006 from May 31, 2005 and the interest rate was reset based upon
          the
          30-day LIBOR rate plus 2.50%. Amounts not drawn under the loan were subject
          to a
          standby fee payable quarterly at 0.125% per annum. The Company paid on
          closing a
          commitment fee of 0.75% of the total commitment (US$150). In connection
          with the
          loan, the Company granted Kaiser-Francis a security interest in all of
          the
          assets of the Company and a pledge of the LDI shares. The security interests
          in
          all of the assets of the Company were subordinated to the security interests
          of
          the senior credit facility (note 10). The Kaiser-Francis credit facility
          due to
          mature June 30, 2006 was repaid on June 23, 2006 pursuant to the terms
          of the
          Series II convertible note issued on that date (also refer to note 9).
          As at
          December 31, 2006 the outstanding loan from this facility was nil (2005
          -
          US$11,500; Cdn$13,407).
  On
          October 12, 2006, the Company received from Kaiser-Francis a $US5,000 short-term
          working capital loan maturing December 31, 2006. The interest rate under
          the
          loan is a 30-day LIBOR rate plus 2.5%. The Company paid a commitment fee
          of
          US$38 and amounts not drawn under the loan are subject to a standby fee
          of
          0.125% per annum. In connection with the loan, the Company granted to
          Kaiser-Francis a first priority security interest in the inventory and
          receivables of the Company. On December 13, 2006 the maturity date was
          extended
          to March 31, 2007, with no other changes in terms. The Company paid a commitment
          fee of US$25 for the extension. As at December 31, 2006, the outstanding
          loan
          was $US5,000 (Cdn$5,827) - (2005 - nil). The loan agreement includes customary
          representations, warranties and covenants, including a covenant by the
          Company
          not to pay dividends or make any other payment to shareholders while the
          loan is
          outstanding. The loan agreement also provides for customary events of default.
  **12.
          RELATED PARTY TRANSACTIONS AND COMMITMENTS**
 Kaiser-Francis
            is the controlling shareholder of the Company. In addition to the related
            party
            transactions with Kaiser-Francis disclosed in notes 9 and 11, the Company
            has
            the following related party transaction:
  In
          2005,
          a now former director of the Company received a fee of $218, (2004 - $581)
          in
          connection with the negotiations related to the Palladium Sales Contract
          entered
          into by the Company in 2000 (note 15(a)). The contract was negotiated at
          arms-length prior to such person becoming a director of the Company. The
          Palladium Sales Contract expired on June 30, 2005, and no further fees
          are
          payable in connection with this contract.
  
 14
  
  
 **13.
          COMMON SHARE CAPITAL AND COMMON SHARE PURCHASE WARRANTS**
  The
          authorized capital stock of the Company consists of an unlimited number
          of
          common shares and an unlimited number of special shares, issuable in series,
          including 10,000,000 Series “A” preferred shares.
  **(a)
          Common shares and common share purchase warrants:**
 The
          changes in issued common share capital and common share purchase warrants
          for
          the year are summarized below:
  **2006**
                
                
                
                2005**Shares**
                
                **Amount**
                
                Shares
                
                AmountCommon
                    shares issued, beginning of year
                
                
                **52,197,217**
                
                **$**
                **325,592**
                
                
                51,709,075
                
                $
                322,904Common
                    shares issued:Pursuant
                    to stock options exercised
                
                
                **130,755**
                
                
                **910**
                
                
                118,759
                
                
                697Fair
                    value of stock options exercised
                
                
                **-**
                
                
                **166**
                
                
                -
                
                
                287To
                    Group Registered RetirementSavings
                    Plan participants
                
                
                **107,563**
                
                
                **1,085**
                
                
                156,383
                
                
                1,140For
                    interest payments on convertiblenotes
                    payable
                
                
                **242,158**
                
                
                **1,974**
                
                
                -
                
                
                -Private
                    placement (net)
                
                
                **270,000**
                
                
                **3,045**
                
                
                213,000
                
                
                2,503Tax
                    effect of flow-through shares
                
                
                **-**
                
                
                **(1,067**
                **)**
                
                -
                
                
                (1,939
                )Common
                  shares issued, end of year
                
                
                **52,947,693**
                
                **$**
                **331,705**
                
                
                52,197,217
                
                $
                325,592Common
                  shares purchase warrants - Note
                  13(b)Issued
                    pursuant to terms of Series Iconvertible
                    notes, net of issue costs
                
                
                **1,436,782**
                
                
                **6,238**
                
                
                -
                
                
                -Issued
                    pursuant to terms of Series IIconvertible
                    notes, net of issue costs
                
                
                **554,187**
                
                
                **1,800**
                
                
                -
                
                
                -**1,990,969**
                
                **$**
                **8,038**
                
                
                -
                
                
                -Balance,
                  end of year
                
                
                
                
                **$**
                **339,743**
                
                
                
                
                $
                325,592
  **(b)
          Common share purchase warrants:**
 Pursuant
          to the terms of the securities purchase agreement governing the issue of
          the
          convertible notes payable, warrants to purchase 1,990,969 common shares
          were
          issued and are outstanding as follows:
   Number
                    of
                Exercise
                ExpiryWarrants
                Price
                Date1,436,782
                US$13.48
                March
                    29, 2010554,187
                US$13.48
                June
                    23, 2010
  **(c)
          Group Registered Retirement Savings Plan**
 The
          Company has a group registered retirement savings plan, which all employees
          can
          participate in at their option. The Company is required to make matching
          contributions to a maximum of $5 per employee per annum. The Company’s matching
          contribution can be made either in cash or treasury shares of the Company.
          During 2006 the Company contributed 107,563 shares with a fair value of
          $1,085,
          (2005 -
          156,383
          shares with a fair value of $1,140).
  **(d)
          Private Placement**
 On
          June
          23, 2006, the Company completed a private placement of 270,000 flow-through
          common shares. The gross proceeds of $3,375 must be spent on Canadian
          exploration expenses prior to December 31, 2007. As at December 31, 2006,
          the
          Company has spent $1,634 on Canadian exploration expenses as defined in
          Section
          66 of the Income Tax Act (Canada).
  
 15
  
  On
          April
          21, 2005, the Company completed a private placement of 213,000 flow-through
          common shares. The gross proceeds of $2,503 were spent on Canadian exploration
          expenses as defined in Section 66 of the Income Tax Act (Canada) prior
          to
          December 31, 2006.
  On
          July
          9, 2004, the Company completed a private placement of 270,000 flow-through
          common shares. The gross proceeds of $4,050 were spent on Canadian exploration
          expenses prior to December 31, 2005.
  Under
          the
          terms of the flow through common share issues, the tax attributes of the
          related
          expenditures will be renounced to investors and the share capital will
          be
          reduced and future income tax liabilities will be increased by the estimated
          income tax benefits renounced by the Company to the investors. The tax
          attributes for the 2005 expenditures were renounced in 2006, and those
          from 2004
          were renounced in 2005.
  **(e)
          Corporate Stock Option Plan**
 The
          Company has adopted, and the shareholders have approved, the Corporate
          Stock
          Option Plan (the “Plan”), under which eligible directors, officers, employees
          and consultants of the Company are entitled to receive options to acquire
          common
          shares. The Plan is administered by the Compensation Committee, a subcommittee
          of the Board of Directors, which determines the number of options to be
          issued,
          the exercise price (which may not be lower than the closing price of the
          Company’s common shares on the Toronto Stock Exchange (“TSX”) on the day prior
          to the date of grant) and expiration dates of each option, the extent to
          which
          each option is exercisable provided that the term of an option shall not
          exceed
          10 years from the date of grant, as well as establishing a limited time
          period
          should the optionee cease to be an “Eligible Person” as set forth in the
          conditions of the Plan. Options granted since December 2001 vest as to
          1/3 on
          each of the first three anniversary dates of the date of grant. Prior to
          December 2001, options granted under the Plan vested as to 1/3 on the date
          of
          grant and 1/3 on each of the first two anniversary dates.
  The
          maximum number of common shares available for option grants shall not exceed
          2,700,000, being approximately 5.1% of the outstanding common shares or
          such
          greater number of common shares as may be determined by the Board of Directors,
          and approved if required, by the shareholders of the Company and by any
          relevant
          stock exchange or other regulatory authority. As at December 31, 2006,
          534,057
          options (2005 - 461,308 options) were available to be granted under the
          Plan.
  The
          following summary sets out the activity in outstanding stock options:
  **2006**
                
                
                
                2005**Weighted-**
                
                
                
                Weighted-**Average**
                
                
                
                Average**Exercise**
                
                
                
                Exercise**Shares**
                
                **Price**
                
                Shares
                
                PriceOutstanding,
                    beginning of year
                
                
                **563,638**
                
                **$**
                **10.43**
                
                
                825,610
                
                $
                9.88Granted
                
                
                **65,000**
                
                
                **8.15**
                
                
                100,000
                
                
                9.75Exercised
                
                
                **(130,755**
                **)**
                
                **6.96**
                
                
                (118,759
                )
                
                5.87Cancelled
                
                
                **(137,750**
                **)**
                
                **13.15**
                
                
                (243,213
                )
                
                10.51Outstanding,
                    end of year
                
                
                **360,133**
                
                **$**
                **10.24**
                
                
                563,638
                
                $
                10.43Options
                    exercisable at end of year
                
                
                **166,432**
                
                **$**
                **10.70**
                
                
                265,571
                
                $
                11.09
 
 
 16


The
        following table summarizes information about the Company’s stock options
        outstanding at December 31, 2006:
  OptionsOutstanding
                  at
              
              Options
                ExercisableExercise
                Price
              
              Expiry
                  Dates
              
              Dec.
                  31, 2006
              
              at
                Dec. 31, 2006$
              3.42
              
              
              April
                  7, 2011
              
              
              5,000
              
              
              5,000$
              4.75
              
              
              February
                  27, 2011
              
              
              7,500
              
              
              7,500$
              7.85
              
              
              August
                  26, 2014
              
              
              30,000
              
              
              -$
              8.40
              
              
              June
                  20, 2014
              
              
              35,000
              
              
              -$
              8.83
              
              
              December
                  14, 2013
              
              
              10,000
              
              
              3,333$
              9.67
              
              
              November
                  30, 2013
              
              
              40,000
              
              
              13,333$
              9.76
              
              
              November
                  1, 2012
              
              
              15,000
              
              
              10,000$
              10.00
              
              
              November
                  27, 2013
              
              
              50,000
              
              
              16,667$
              10.01
              
              
              June
                  6, 2010
              
              
              6,000
              
              
              6,000$
              11.90
              
              
              June
                  23, 2012
              
              
              161,633
              
              
              104,599360,133
              
              
              166,432
 
 Prior
        to
        January 1, 2003, the Company did not recognize compensation expense for stock
        options. Had compensation expense for options granted in 2002 under the
        Company’s stock option plan been determined based on the fair value at the grant
        dates consistent with the fair value based method of accounting for stock-based
        compensation, the Company’s net income and earnings per share would have been
        reduced to the pro forma amounts indicated below:
  **2006**
              2005
              2004Net
                  loss as reported
              
              **$**
              **(34,109**
              **)**
              $
              (53,611
              )
              $
              (92,110
              )Stock-based
                  compensation
              
              
              **-**
              
              
              -
              
              
              160Pro
                  forma net loss
              
              **$**
              **(34,109**
              **)**
              $
              (53,611
              )
              $
              (92,270
              )Pro
                  forma basic and diluted loss per share
              
              **$**
              **(0.65**
              **)**
              $
              (1.03
              )
              $
              (1.80
              )
 
 The
        fair
        value of options granted in 2006 has been estimated at the date of grant
        using
        the Black-Scholes option pricing model with the following weighted average
        assumptions: risk free interest rate of 4.05 % (2005 - 3.78%; 2004 - 3.7%),
        expected dividend yield of nil (2005 - nil; 2004 - nil), expected volatility
        of
        56% (2005 - 55%; 2004 - 55%), and expected option life of 4 years (2005 -
        4
        years; 2004 - 4 years). The estimated fair value of the options is expensed
        over
        the option’s vesting period, which is 3 years. The weighted average fair market
        value of options granted in 2006 was $3.78 (2005 - $4.51; 2004 - $5.43).
        Compensation expense related to the Plan for the year ended December 31,
        2006
        was $561 (2005 - $582; 2004 - $573).
  **(f)
        Reconciliation of the diluted number of shares outstanding:**
  **2006**
              
              2005
              
              2004Net
                  loss available to common shareholders
              
              **$**
              **(34,109**
              **)**
              $
              (53,611
              )
              $
              (92,110
              )Weighted
                  average number of shares outstanding
              
              
              **52,562,939**
              
              
              52,006,548
              
              
              51,379,542Effect
                  of dilutive securities stock options
              
              
              **-**
              
              
              -
              
              
              -Weighted
                  average diluted number of shares outstanding
              
              
              **52,562,939**
              
              
              52,006,548
              
              
              51,379,542Diluted
                  net loss per share
              
              **$**
              **(0.65**
              **)**
              $
              (1.03
              )
              $
              (1.79
              )
 
 The
        effect of stock options has not been included in the determination of diluted
        loss per share for 2006, 2005 or 2004, because to do so would be antidilutive.
  
 17
  
  At
        December 31, 2006, there were 6,172,671, (2005 - 290,571) equity instruments
        convertible to common shares. These have been excluded from the calculation
        of
        diluted net loss per share because to do so would have been antidilutive.
        These
        equity instruments could potentially dilute basic earnings per share in the
        future.
  **(g)
        Other Stock-Based Compensation - Restricted Share Unit Plan**
 Effective
        December 14, 2005, the Company adopted a RSU plan under which eligible
        directors, officers and key employees of the Company are entitled to receive
        awards of restricted share units. Each restricted share unit means a unit
        equivalent in value to the fair market value of a common share of the Company
        on
        the date of the award. The RSU plan is administered by the Board of Directors,
        which will determine after considering recommendations made by the compensation
        committee, the number and timing of restricted share units to be awarded
        and
        their vesting periods, not to exceed three years. On each relevant full vesting
        date of awarded restricted share units, the participant will receive a lump
        sum
        cash payment equivalent to the market value of the equivalent number of common
        shares. The value of each award is charged to compensation expense over the
        period of vesting and a corresponding liability is established on the balance
        sheet. The compensation expense and liability are adjusted to reflect the
        changes in market value of the equivalent number of common shares during
        the
        vesting period.
  As
        at
        December 31, 2006, 33,333 (2005 - 25,000) restricted share units have been
        granted and are outstanding at a weighted average value of $9.09 (2005 -
        $9.64)
        per unit and $180 (2005 - $6) has been charged to compensation expense. The
        market value of the restricted share units as at December 31, 2006 is $8.87
        (2005 - $9.81) per unit.
  **14.
        FAIR VALUE OF FINANCIAL INSTRUMENTS**
 The
        fair
        value of the obligations under capital leases approximate their carrying
        value
        due to the interest rate implicit in the leases approximating interest rates
        available at this time for similar lease terms. The fair value of the
        convertible notes approximate their carrying value due to the interest rate
        implicit in the convertible notes approximating interest rates available
        at this
        time for similar convertible notes payable. The carrying amounts of all other
        financial instruments on the balance sheet approximate fair value due to
        their
        short-term maturities. As at December 31, 2006, the unrealized loss on the
        fair
        value of the Company’s outstanding forward commodity sales contracts was nil
        (2005 - US$240).
  **15.
        COMMITMENTS**
 **(a)
        Palladium Sales Contract**
 In
        2000,
        the Company entered into a contract (the “Palladium Sales Contract”) whereby the
        Company hedged the price of 100% of its palladium production. Under the
        Palladium Sales Contract the sales price was based on the monthly average
        spot
        price for palladium, as determined by the London Metal Exchange P.M. fix,
        for
        the month prior to the month that the metal was received by the customer,
        but
        the price was no less than US$325 per ounce for 100% of the metal received
        and
        no more than US$550 per ounce for 50% of the metal received. For the remaining
        50% of the metal received, there was no maximum price. The Palladium Sales
        Contract’s term commenced effective July 1, 2000 and expired on June 30, 2005.
        For palladium delivered after June 30, 2005, the Company entered into palladium
        sales contracts that provided for the delivery of palladium at the monthly
        average price in the month prior to delivery based on the London PM fix price
        or
        spot price on the day of delivery. These contracts expired on December 31,
        2005
        and currently the Company is selling its monthly palladium production into
        the
        spot market.
  **(b)
        Sheridan Platinum Group of Companies (“SPG”) Commitment**
 The
        Company is required to pay a royalty to SPG equal to 5% of the Net Cash
        Proceeds, as defined in the agreement from mining operations until the
        expiration of the Lac des Iles leases.
  
 18
  
  **(c)
        Operating Leases and Other Purchase Obligations**
 As
        at
        December 31, 2006, the Company had outstanding operating lease commitments
        and
        other purchase obligations of $1,714 and $1,352, respectively (2005 - $1,053
        and
        $5,175) all of which had maturities of less than four years.
  **(d)
        Flow-through shares**
 To
        satisfy its commitments pursuant to the issuance of flow-through shares,
        the
        Company is required to spend $3,375 of qualifying Canadian exploration expenses,
        as defined in the Income Tax Act (Canada), by December 31, 2006 (2005 - $2,503).
  **16.
        REVENUE FROM METAL SALES**
  **2006**
              
              2005
              
              2004Palladium
              
              **$**
              **75,644**
              
              $
              43,398
              
              $
              113,788Nickel
              
              
              **33,300**
              
              
              16,041
              
              
              25,735Platinum
              
              
              **24,436**
              
              
              17,144
              
              
              21,476Gold
              
              
              **9,844**
              
              
              6,568
              
              
              10,665Copper
              
              
              **14,825**
              
              
              8,284
              
              
              10,945Other
                  metals
              
              
              **1,151**
              
              
              1,171
              
              
              2,595**$**
              **159,200**
              
              $
              92,606
              
              $
              185,204
 
 The
        Company sells all of its concentrate to one customer (2005 - two customers)
        under the terms of an agreement. The customer has agreed to smelt and refine
        all
        of the Company’s concentrate through to April 30, 2007. The Company is currently
        in negotiations with the customer to extend the agreement.
  **17.
        CONTINGENCIES**
 (a)
              The
                  Company is a defendant in an action by another mining company commenced
                  in
                  1991 claiming actual damages in the amount of $20,000, punitive
                  and
                  exemplary damages in the amount of $5,000, and a declaration that
                  the
                  Company held the Compania Minerales de Copan, S.A. de C.V. (“Copan”)
                  property in trust for the plaintiff. This action relates to a predecessor
                  company of the Company and has been inactive for many years. No
                  provision
                  has been made in the accounts as at December 31, 2006 or 2005 for
                  any
                  possible loss from this action as management of the Company believes
                  it
                  has a valid defense and it has been indemnified by SPG regarding
                  this
                  action. In addition, certain stock options are claimed to be held
                  by
                  employees of Copan. These options have not been included in note
                  13(e) as
                  the Company has been indemnified by SPG regarding such matters.
 
 (b)
              The
                  Company has filed a claim with its insurance company relating to
                  losses
                  incurred in connection with the failure of the primary crusher
                  in 2002.
                  During 2004, the Company received $7,148 as an interim payment
                  against
                  this claim and has included this amount in income from mining operations.
                  The Company is pursuing the balance of its insurance claim and
                  will record
                  any additional recovery in income if and when received.
 
 (c)
              From
                  time to time, the Company is involved in other litigation, investigations,
                  or proceedings related to claims arising out of its operations
                  in the
                  ordinary course of business. In the opinion of the Company’s management,
                  these claims and lawsuits in the aggregate, even if adversely settled,
                  will not have a material effect on the consolidated financial statements.
 
 
 19
  
  **18.
        INCOME TAXES**
  The
        provision for income and mining taxes differs from the amount that would
        have
        resulted by applying the combined Canadian Federal and Ontario statutory
        income
        tax rates of approximately 36%.
  **2006**
              
              2005
              
              2004Income
                  tax recovery using statutory income tax rates
              
              **$**
              **(12,822**
              **)**
              $
              (21,524
              )
              $
              (35,406
              )Increase
                  (decrease) in taxes resulting from:Write
                  down of mining interests not tax benefited
              
              
              **-**
              
              
              -
              
              
              35,694Resource
                  allowance
              
              
              **133**
              
              
              3,354
              
              
              6,439Non-taxable
                  portion of capital gains
              
              
              **(76**
              **)**
              
              (162
              )
              
              (2
              )Losses
                  not tax benefited
              
              
              **11,002**
              
              
              16,556
              
              
              389Increase
                  in valuation allowance on assets previously recognized
              
              
              **-**
              
              
              -
              
              
              2,525Losses
                  incurred in foreign entities, taxed at a lower rate
              
              
              **701**
              
              
              -
              
              
              -Benefit
                  of income tax losses not previously recognized
              
              
              **-**
              
              
              -
              
              
              (437
              )Federal
                  large corporations taxes
              
              
              **-**
              
              
              339
              
              
              465Ontario
                  mining taxes
              
              
              **(195**
              **)**
              
              (1,654
              )
              
              (7,979
              )Other
              
              
              **(152**
              **)**
              
              209
              
              
              102Income
                  tax expense (recovery)
              
              **$**
              **(1,409**
              **)**
              $
              (2,882
              )
              $
              1,790
 
 The
                  details of the Company’s income tax expense are as follows:**2006**
              
              2005
              
              2004Current
                  income tax expense (recovery):Income
                  taxes
              
              **$**
              **(360**
              **)**
              $
              (15
              )
              $
              102Mining
                  taxes
              
              
              **(310**
              **)**
              
              80
              
              
              580Federal
                  large corporations taxes
              
              
              **-**
              
              
              339
              
              
              465**$**
              **(670**
              **)**
              $
              404
              
              $
              1,147
 Future
                  income tax expense (recovery):Income
                  taxes
              
              
              **(854**
              **)**
              
              (1,552
              )
              
              9,202Mining
                  taxes
              
              
              **115**
              
              
              (1,734
              )
              
              (8,559
              )**$**
              **(739**
              **)**
              $
              (3,286
              )
              $
              643**$**
              **(1,409**
              **)**
              $
              (2,882
              )
              $
              1,790
 
 
 20
  
  Future
                  tax assets (liabilities) consist of the following temporary differences:**2006**
              
              2005Current
                  future income tax asset:Cash
                  and cash equivalents
              
              **$**
              **-**
              
              $
              526Valuation
                  allowance
              
              
              **-**
              
              
              (346
              )Net
                future income tax asset, current
              
              **$**
              **-**
              
              $
              180Long-term
                future income tax asset:Mining
                  interests, net
              
              **$**
              **38,185**
              
              $
              42,238Deferred
                  financing costs
              
              
              **414**
              
              
              26Mine
                  restoration obligation
              
              
              **2,532**
              
              
              2,780Future
                  mining tax liability
              
              
              **101**
              
              
              45Other
                  assets
              
              
              **199**
              
              
              213Non-capital
                  loss carry-forwards
              
              
              **13,363**
              
              
              10,413Ontario
                  corporate minimum tax credits
              
              
              **327**
              
              
              327Capital
                  loss carry-forwards
              
              
              **847**
              
              
              927Valuation
                  allowance
              
              
              **(55,089**
              **)**
              
              (55,565
              )Net
                  future income tax asset, long-term
              
              
              **879**
              
              
              1,404Future
                income tax liability, long-term:Long-term
                  debt
              
              
              **(289**
              **)**
              
              (441
              )Convertible
                  notes payable
              
              
              **40**
              
              
              -Kaiser-Francis
                  credit facility
              
              
              **(4**
              **)**
              
              (859
              )Obligations
                  under capital leases
              
              
              **(72**
              **)**
              
              (104
              )Net
                  future income tax liability, long term
              
              
              **(325**
              **)**
              
              (1,404
              )Net
                  future income tax asset, long-term
              
              **$**
              **554**
              
              $
              -Future
                income tax liability, current:Inventories
              
              
              **(147**
              **)**
              
              -Crushed
                  and broken ore stockpiles
              
              
              **(399**
              **)**
              
              -Deferred financing
                  costs
              
              
              **(8**
              **)**
              
              (180
              )Future
                  income tax liability, current
              
              **$**
              **(554**
              **)**
              $
              (180
              )Future mining tax liability, current:Inventories
              
              
              **(40**
              **)**
              
              -Crushed
                  and broken ore stockpiles
              
              
              **(109**
              **)**
              
              -Future
                  mining tax liability, current
              
              **$**
              **(149**
              **)**
              $
              -Future
                mining tax liability, long-term:Mining
                  interests, net
              
              
              **(1,499**
              **)**
              
              (1,301
              )Provision
                  for mine closure costs
              
              
              **420**
              
              
              428Mine
                  restoration obligation
              
              
              **698**
              
              
              671Future
                  mining tax liability, long-term
              
              **$**
              **(381**
              **)**
              $
              (202
              )
  At
          December 31, 2006, the Company had capital loss carry-forwards of approximately
          $5,100 (2005 - $5,100), which are available to reduce capital gains of
          future
          years.
  At
          December 31, 2006, the Company and its subsidiary had non capital losses
          of
          approximately $37,500 (2005 - $28,200), of which $28,200 expires in 2015
          and
          $9,300 expires in 2026. None of the benefit from these losses has been
          recognized in the financial statements.
  
 21
  
  **19.
        STATEMENT OF CASH FLOWS**
 (a)
        The
        net changes in non-cash working capital balances related to operations are
        as
        follows: ****
  **2006**
              
              2005
              
              2004Cash
                  provided by (used in):Concentrate
                  awaiting settlement
              
              **$**
              **(44,597**
              **)**
              $
              30,806
              
              $
              26,351Inventories
                  and stockpiles
              
              
              **(3,727**
              **)**
              
              3,484
              
              
              1,786Other
                  assets
              
              
              **(258**
              **)**
              
              (729
              )
              
              (229
              )Accounts
                  payable and accrued liabilities
              
              
              **5,009**
              
              
              (3,839
              )
              
              2,613Taxes
                  payable
              
              
              **(531**
              **)**
              
              (135
              )
              
              (790
              )**$**
              **(44,104**
              **)**
              $
              29,587
              
              $
              29,731
 
 (b)
                  Cash outflows during the year for interest and income taxes were
                  as
                  follows:**2006**
              
              2005
              
              2004Interest
                  paid on long-term debt
              
              **$**
              **2,319**
              
              $
              2,477
              
              $
              1,854Interest
                  paid on obligations under capital leases
              
              
              **592**
              
              
              339
              
              
              111Income
                  and mining taxes paid
              
              **$**
              **291**
              
              $
              699
              
              $
              436
  (c)
          On
          June 23, 2006, the Company, in a non cash transaction, issued a Series
          II
          convertible note in the principal amount of US$13,500 to Kaiser-Francis
          to repay
          the US$13,500 outstanding under the credit facility with Kaiser-Francis,
          due to
          mature on June 30, 2006 (also refer to Note 9).
  (d)
          The
          Series I and II convertible notes bear interest at a rate of 6.5% per annum
          payable bi-monthly, commencing on June 1, 2006 and August 1, 2006, respectively.
          The interest payments may be paid to each Purchaser, at the Purchaser’s option,
          in any combination of cash and/or common shares. During 2006, in a series
          of non
          cash transactions, the Purchasers elected to receive common shares in settlement
          of their interest expense in the amount of $1,974 (2005 - nil).
  (e)
          During 2006, mining interests were acquired at an aggregate cost of $19,384
          (2005 - $41,998; 2004 -
          $33,058) of which nil (2005 - $6,583; 2004 - $4,330) were acquired by means
          of
          capital leases.
  **20.
        SUBSEQUENT EVENTS**
 (a)
        On
        January 19, 2007 the Company entered into a palladium and platinum agreement
        with Auramet Trading, LLC (“Auramet”), a precious metals merchant, providing for
        the sale of an average of 10,000 ounces of palladium and 500 ounces of platinum
        per month. The Company may not request Auramet to purchase metals after June
        15,
        2008 and all sales and payments prior to that date are required to be settled
        by
        December 31, 2008. Under the terms of the agreement the Company may receive
        advance payments not exceeding, at any time, an aggregate maximum of US$25,000.
  The
        purchase price may 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, as defined under the terms of the agreement, by
        the
        Company to Auramet that have been concluded; and in the case of provisional,
        the
        afternoon fixing of the London Bullion Marketing Association immediately
        preceding the purchase. In each case such pricing will reflect the forward
        value
        corresponding to the scheduled delivery date. Advance payments to the Company
        may not exceed specified values of fixed and provisionally priced platinum
        and
        palladium. Provisional prices must be fixed prior to the scheduled delivery
        date
        for such precious metals. Each advance payment will be subject to a discount
        equal to LIBOR plus 1.9% 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 will pay to the Company the difference
        between the advance payment and the purchase price.
  
 22
  
  To
        secure
        the obligations of the Company under the Agreement, the Company has granted
        to
        Auramet a security interest, among other things, in the concentrates (including
        the precious and base metals contained therein) mined at the Lac des Iles
        mine,
        together with the proceeds arising from the sale of the concentrate, and,
        by way
        of security, an assignment of its smelting and refining agreement.
  The
        first
        advance payment was used to repay a bridge loan from the Company’s major
        shareholder and subsequent advance payments will be used to finance working
        capital requirements.
  (b)
        On
        February 27, 2007, the Company completed a private placement of 550,000 Common
        Shares on a flow-through basis at $11.00 per Common Share. The gross proceeds
        of
        $6,050 must be spent on Canadian exploration expenses prior to December 31,
        2008.
  **21.
        COMPARATIVE FIGURES.**
 Certain
        of the prior years’ figures have been reclassified to conform to the
        presentation adopted in 2006.
  
  23




Document
      No. 3













**AUDITORS'
        REPORT ON RECONCILIATION** **TO
        UNITED STATES GAAP**
  To
        the Board of Directors of North American Palladium Ltd.
  On
        February 27, 2007, we reported on the consolidated balance sheets of North
        American Palladium Ltd.
        (the "Company") as at December 31, 2006 and 2005 and the consolidated statements
        of loss and
        deficit and cash flows for each of the years in the three year period ended
        December 31, 2006 which are included in the annual report on Form 40-F. In
        connection with our audits conducted in accordance
        with Canadian generally accepted auditing standards of the aforementioned
        consolidated financial
        statements, we also have audited the related supplemental schedule entitled
        "Reconciliation to
        Accounting Principles Generally Accepted in the U.S." included in the Form
        40-F.
        This supplemental
        schedule is the responsibility of the Company's management. Our responsibility
        is to express
        an opinion on this supplemental schedule based on our audits.
  In
        our opinion, such supplemental schedule, when considered in relation to the
        basic consolidated financial
        statements taken as a whole, presents fairly, in all material respects, the
        information set forth
        therein.
  Chartered
        Accountants
   /s/
        KPMG
        LLP
 
 Toronto,
        Canada
 February 27,
        2007, except as to this schedule which is as of March 30, 2007


**Reconciliation
        to Accounting Principles Generally Accepted in the United
        States.**
 
 The
        Company’s consolidated financial statements for the three years ended December
        31, 2006, 2005 and 2004 have been prepared in accordance with Canadian generally
        accepted accounting principles (“Canadian GAAP”), which differ in some respects
        from those in the United States. The following table presents amounts that
        would
        have been reported had the Company’s consolidated financial statements been
        prepared on the basis of accounting principles generally accepted in the
        United
        States (“U.S. GAAP”):
 
 (Canadian
        funds in thousands of dollars, except per share amounts)
  2006
              
              2005
              
              2004Statements
                  of loss and deficit:Loss
                  under Canadian GAAP
              
              $
              (34,109
              )
              $
              (53,611
              )
              $
              (92,110
              )Capitalized
                  interest (a)
              
              
              603
              
              
              1,089
              
              
              --Amortization
                  of capitalized interest (a)
              
              
              (446
              )
              
              (62
              )
              
              (95
              )Concentrates
                  and crushed and broken ore stockpiles (b)
              
              
              —
              
              
              (2,944
              )
              
              295Derivative
                  financial instruments (c)
              
              
              277
              
              
              475
              
              
              2,041Tax
                  liability on flow-through financing (e)
              
              
              (143
              )
              
              (1,116
              )
              
              —Accretion
                  expense relating to convertible notes (h)
              
              
              (255
              )
              
              —
              
              
              —Amortization
                  of deferred financing costs (h)
              
              
              (353
              )
              
              —
              
              
              —Fair
                  value adjustment on embedded derivatives and common share purchase
                  warrants (h)
              
              
              15,148
              
              
              —
              
              
              —Loss
                  and comprehensive loss under U.S. GAAP
              
              $
              (19,278
              )
              $
              (56,169
              )
              $
              (89,869
              )Basic
                  and diluted loss per share under U.S. GAAP
              
              $
              (0.37
              )
              $
              (1.08
              )
              $
              (1.75
              )
  
 
 Balance
                  sheets:
              
              2006
              
              2005$
              
              $Current
                  assets (b) and (c)
              
              
              109,248
              
              
              70,417Mining
                  interests (a)
              
              
              148,390
              
              
              161,108Crushed
                  and broken ore stockpiles - long term (b)
              
              
              289
              
              
              239Deferred
                  financing costs (h)
              
              
              1,576
              
              
              654Future
                  tax liability (e)
              
              
              2,662
              
              
              1,669Liabilities
                  - current portion of convertible notespayable
                  (h)
              
              
              20,992
              
              
              --- convertible notes payable (h)
              
              
              22,516
              
              
              --- embedded derivatives (h)
              
              
              3,702
              
              
              --- common share purchase warrants (h)
              
              
              4,479
              
              
              --Common
                  share capital and common share purchase warrants
                  (d),(e),(h)
              
              
              336,440
              
              
              331,137Equity
                  component of convertible notes payable (h)
              
              
              --
              
              
              --Deficit
                  (d),(e),(h)
              
              
              (184,439
              )
              
              (165,161
              )
 
 *(a)* Under
        Canadian GAAP, the Company capitalizes interest on major projects where direct
        indebtedness has occurred and commences amortization upon reaching commercial
        production. Under U.S. GAAP, interest is capitalized as it arises from
        indebtedness incurred, directly or indirectly, to finance development and
        construction activities on assets that are not yet subject to amortization
        or
        depletion. For 2006, interest of $603 (2005 - $1,089; 2004 - nil), respectively,
        has been capitalized related to the investment in the underground development,
        which reached commercial production during the first quarter of 2006. Upon
        the
        underground mine reaching commercial production, the Company commenced
        amortization of interest capitalized for the underground development, in
        addition to the amortization of interest amounts previously capitalized under
        U.S. GAAP.
 
 *(b)*  The
        cost
        of the Company’s concentrate inventory
        and crushed and broken ore stockpiles is determined using the average production
        costs including an allocation of the amortization of production related assets.
        At December 31, 2006, the Company recorded its concentrate inventory and
        crushed
        and broken ore stockpiles at their net realizable value. Amounts adjusted
        under
        U.S. GAAP for 2005 and 2004, include amounts previously included in the cost
        of
        these inventories under U.S. GAAP for periods prior to January 1, 2004, the
        date
        the Company commenced including amortization in the cost of inventories under
        Canadian GAAP.
 
 *(c)* Under
        U.S. GAAP, the Company has chosen not to designate its derivative financial
        instruments as hedging instruments and thus they are carried on the balance
        sheet at their fair value and any changes in fair value are being recorded
        to
        earnings in the period of the change.
 
 *(d)* Canadian
        GAAP allows for the reduction of the stated capital of outstanding common
        shares
        with a corresponding offset to deficit. This reclassification, which the
        Company
        made in 1991, is not permitted by U.S. GAAP and would result in an increase
        in
        both capital stock and deficit of $6,098 as at December 31, 2006 and
        2005.
  
  *(e)*  Under
        U.S. GAAP, the renunciation of tax deductions to holders of flow-through
        shares
        is treated as a future tax expense rather than as a cost of issuing equity
        as
        required by Canadian GAAP.
 
 *(f)*  U.S.
        GAAP
        requires that amounts totaling 5% or more of current liabilities be identified
        separately. As at December 31, 2006, these amounts were as follows: trade
        payables and accruals - $17,141 (2005 - $13,597); other accruals - $4,385
        (2005
        - $2,670).
 
 *(g)*  U.S.
        GAAP
        does not permit the disclosure of subtotal of cash from operations before
        changes in non-cash working capital.
 
 *(h)* Under
        Canadian GAAP, the components of the convertible notes payable must be
        bifurcated and accounted for separately as debt and equity instruments. The
        attached warrants are separable from the convertible notes and are accounted
        for
        as an equity instrument. The Company allocated the gross proceeds received
        to
        the debt and equity components of the notes and the warrants on a relative
        fair
        value basis. The Series I proceeds received were allocated as follows; US$20,558
        to the debt, US$8,808 to the equity component and US$5,634 to the warrants.
        The
        Series II proceeds were allocated as follows: US$9,578 to the debt, US$2,312
        to
        the equity component and US$1,610 to the warrants. Issuance costs of $2,364
        were
        allocated pro-rata to the debt ($1,398) and equity components ($589) and
        to the
        associated warrants ($377) on a relative fair value basis. The issuance costs
        related to the debt components will be amortized over the respective terms
        of
        the convertible notes on an effective yield basis (Series I- 42%; Series
        II-
        28%).  In
        addition, a liability (the “Equity Premium”) was recognized for the holders’
option to receive common shares, in lieu of cash, at a 10% discount to the
        five
        day weighted trading price for interest and principal payments. The
        Company will be required to accrete the carrying value of the convertible
        notes
        and the Equity Premium such that at each installment payment date, the carrying
        value of the notes and the Equity Premium will be equal to the face value
        of the
        notes and the liability related to the Equity Premium. For the year ended
        December 31, 2006, the Company recorded accretion expense of $10,090 of which
        $2,160 represented the accretion relating to the Equity Premium which was
        included in the carrying value of the convertible notes payable as at December
        31, 2006.
 
 Under
        U.S. GAAP, an embedded derivative included in a debt arrangement for which
        the
        economic characteristics and risks are not clearly and closely related to
        the
        economic characteristics of the debt host contract must be measured at fair
        value and presented as a liability. Changes in fair value of the embedded
        derivatives are recorded in the consolidated statements of loss and deficit
        at
        each reporting date. Embedded derivatives that meet the criteria for bifurcation
        from the convertible notes payable and that are measured at fair value consist
        of the holders’ conversion right, the Company’s contingent conversion option and
        the holders’ contingent redemption and conversion rights in the event of a
        change in control or an event of default. Under Canadian GAAP, there is no
        requirement to identify and measure the other embedded derivatives.
  
  Under
        U.S. GAAP, the common share warrants are presented as a liability and subsequent
        changes in fair value are recorded in the consolidated statements of loss
        and
        deficit at each reporting date.
 
 Under
        U.S. GAAP the Company allocated the residual amount of the gross proceeds
        received to the convertible notes payable after the separate fair value
        measurement of the warrants and embedded derivatives. The Company allocated
        the
        Series I proceeds as follows: US$18,504 to the debt, US$10,060 to the embedded
        derivatives and US$6,436 to the warrants. The Company allocated the Series
        II
        proceeds as follows: US$9,952 to the debt, US$2,092 to the embedded derivatives
        and US$1,456 to the warrants.
 
 All
        of
        the issuance costs related to the convertible note issuances are recognized
        as
        deferred financing costs under U.S. GAAP and are amortized to the consolidated
        statements of loss and deficit using the effective yield basis over the
        respective terms of the notes. The Series I notes and Series II note carry
        an
        effective yield of 49% and 25%, respectively.
 
 Differences
        in U.S. GAAP and Canadian GAAP result from the initial allocation differences
        and the subsequent accretion expenses, amortization of deferred financing
        costs
        and from the fair value re-measurement of the warrant and embedded derivatives
        as liabilities each reporting period under U.S.GAAP.
 
 **Adoption
        of new United States accounting pronouncements**
 
 In
        November 2004, the Financial Accounting Standards Board (“FASB”) issued FAS No.
        151, which clarifies the accounting for abnormal amounts of idle facility
        expense, freight, handling costs and wasted material as they relate to inventory
        costing and requires these items to be recognized as current period expenses.
        Additionally, the allocation of fixed production overheads to the cost of
        inventory should be based on the normal capacity of the production facilities.
        The adoption of FAS No. 151 on January 1, 2006 by the Company had no material
        impact on the consolidated financial statements.
 
 In
        December 2004, FAS No. 123 (revised) “Share-Based Payment”, was issued. This
        statement requires an entity to recognize the grant date fair value of stock
        options and other equity-based compensation issued to employees. In the income
        statement, FAS No. 123 (revised) eliminates the ability to account for
        share-based compensation transactions using the intrinsic value method in
        APB
        No. 25. The adoption of FAS No. 123 (revised) on January 1, 2006 by the Company,
        using the modified prospective application method, had no material impact
        on the
        consolidated financial statements.
 
 In
        May
        2005, the FASB issued FAS No. 154, “Accounting Changes and Error Corrections, a
        Replacement of APB Opinion No. 20 and FAS No. 3”. FAS No. 154 requires
        retrospective application of changes in accounting principle to prior periods’
financial statements, rather than the use of the cumulative effect of a change
        in accounting principle, unless impracticable. If impracticable to determine
        the
        impact on prior periods, then the new accounting principle should be applied
        to
        the balances of assets and liabilities as of the beginning of the earliest
        period for which retrospective application is practicable, with a corresponding
        adjustment to equity, unless impracticable for all periods presented, in
        which
        case prospective treatment should be applied. FAS No. 154 applies to all
        voluntary changes in accounting principle as well as those required by the
        issuance of new accounting pronouncements if no specific transition guidance
        is
        provided. FAS No.154 does not change the previously issued guidance for
        reporting a change in accounting estimate or correction of an error. The
        adoption of FAS No. 154 on January 1, 2006 by the Company had no material
        impact
        on the consolidated financial statements.
  
  In
        March
        2005, the FASB ratified EITF 04-06 “Accounting for Stripping Costs in the Mining
        Industry”. The consensus reached is that stripping costs incurred during the
        production phase of a mine are variable production costs that should be included
        in the costs of the inventory produced during the period that the stripping
        costs are incurred. EITF 04-06 is effective for the first reporting period
        in
        fiscal years beginning after December 15, 2005 with early adoption permitted.
        The adoption of EITF 04-06 on January 1, 2006 by the Company had no material
        impact on the consolidated financial statements.
  **Impact
        of recently issued United States accounting
        pronouncements**
  Statement
        of Financial Accounting Standards No. 157, “Fair Value Measurement” (“SFAS 157”)
        was issued September 2006. The Statement provides guidance for using fair
        value
        to measure assets and liabilities. The Statement also expands disclosures
        about
        the extent to which companies measure assets and liabilities at fair value,
        the
        information used to measure fair value, and the effect of fair value measurement
        on earnings. This Statement applies under other accounting pronouncements
        that
        require or permit fair value measurements. This Statement does not expand
        the
        use of fair value measurements in any new circumstances. Under this Statement,
        fair value refers to the price that would be received to sell an asset or
        paid
        to transfer a liability in an orderly transaction between market participants
        in
        the market in which the entity transacts. SFAS 157 is effective for the Company
        for fair value measurements and disclosures made by the Company in its fiscal
        year beginning on January 1, 2008. The Company is currently reviewing the
        impact
        of this statement.
 
 FASB
        Interpretation No.48 “Accounting for Uncertainty in Income Taxes - an
        interpretation of FASB Statement 109” (“FIN 48”) was issued in June 2006. FIN 48
        clarifies the accounting for uncertainty in income taxes recognized in an
        enterprise’s financial statements in accordance with FASB Statement No. 109,
“Accounting for Income Taxes”. FIN 48 prescribes a recognition threshold and
        measurement attribute for the financial statement recognition and measurement
        of
        a tax position taken or expected to be taken in a tax return. FIN 48 also
        provides guidance on de-recognition, classification, interest and penalties,
        accounting in interim periods, disclosure, and transition requirements. The
        Company is currently reviewing the impact on this interpretation which will
        become effective for fiscal years beginning after December 15, 2006,
        specifically, January 1, 2007 for the Company.


**Document
      No. 4**










**N**ORTH****A****MERICAN****P****ALLADIUM
          LTD.****
  
   **MANAGEMENT’S
          DISCUSSION AND ANALYSIS**
  for
          the
          year ended December 31, 2006
  
  
  Management’s
          Discussion and Analysis
  The
          following is Management’s Discussion and Analysis of the financial condition and
          results of operations to enable a reader to assess material changes in
          financial
          condition and results of operations for the year ended December 31, 2006,
          compared to those of the respective periods in prior years. All amounts
          are in
          Canadian dollars unless other wise noted. This Management’s Discussion and
          Analysis has been prepared as of March 7, 2007. This Management’s Discussion and
          Analysis is intended to supplement and complement the audited consolidated
          financial statements and notes thereto for the year ended December 31,
          2006
          (collectively, the “Financial Statements”). You are encouraged to review the
          Financial Statements in conjunction with your review of this Management’s
          Discussion and Analysis.
  **ABOUT
          FORWARD-LOOKING STATEMENTS**
 Securities
          laws encourage companies to disclose forward-looking information so that
          investors can obtain a better understanding of the Company’s future prospects
          and make informed investment decisions. This MD&A contains forward-looking
          statements within the meaning of the “safe harbor” provisions of the United
          States Private Securities Litigation Reform Act of 1995 and applicable
          Canadian
          securities legislation, including the Securities Act (Ontario), relating
          to our
          objectives, plans, strategies, financial condition and results of
          operations. Forward-looking statements may include words such as “estimated”,
“progressing”, “may”, “expect”, “will”, “continue”, “believe” and other similar
          expressions, as they relate to the Company or its management, all of which
          are
          intended to identify forward-looking statements.
  It
          is
          important to note that: (1) unless otherwise indicated, forward-looking
          statements indicate our expectations as at March 20, 2007 (2) our actual
          results
          may differ materially from our expectations if known and unknown risks
          or
          uncertainties affect our business, or if estimates or assumptions prove
          inaccurate; (3) we cannot guarantee that any forward-looking statement
          will
          materialize and, accordingly, you are cautioned not to place undue reliance
          on
          these forward-looking statements; and (4) we disclaim any intention and
          assume
          no obligation to update or revise any forward-looking statement even if
          new
          information becomes available, as a result of future events or for any
          other
          reason.
  In
          making
          the forward-looking statements in this MD&A, the Company has applied several
          material assumptions, including but not limited to, the assumption that:
          (1)
          market fundamentals will result in increased palladium demand and prices
          and
          sustained by-product metal demand and prices; (2) the integrated operation
          of
          the underground mine and the open pit mine remain viable operationally
          and
          economically; (3) financing is available on reasonable terms; (4) expectations
          for blended mill feed head grade and mill performance will proceed as expected;
          (5) new mine plan scenarios will be viable operationally and economically;
          and
          (6) plans for improved mill production, for sustainable recoveries from
          the Lac
          des Iles mine, for further exploration at the Lac des Iles mine and surrounding
          region, and for exploration in Finland proceed as expected. Other assumptions
          are discussed throughout this MD&A and, in particular, in “Critical
          Accounting Estimates” and “Risks and Uncertainties”.
  Important
          factors that could cause actual results to differ materially from those
          expressed or implied by such forward-looking statements include, among
          others:
          (1) metal price volatility; (2) economic and political events affecting
          metal
          supply and demand; (3) fluctuations in ore grade or ore tonnes milled; (4)
          geological, technical, mining or processing problems; (5) future production;
          and
          (6) changes in the life-of-mine plan and/or the ultimate pit design. For
          a more
          comprehensive review of risk factors, please refer to the “Risks and
          Uncertainties” section of the Company’s most recent Annual Report under
“Management’s Discussion and Analysis of Financial Results” and Annual
          Information Form under “Risk Factors” on file with the U.S. Securities and
          Exchange Commission and Canadian provincial securities regulatory authorities.
          The Company disclaims any obligation to update or revise any forward-looking
          statements whether as a result of new information, events or otherwise.
          Readers
          are cautioned not to put undue reliance on these forward-looking statements.
  
 2
  
  **OVERVIEW
            AND STRATEGIC ACTIVITIES**
 North
            American Palladium Ltd. (the “Company”) operates the Lac des Iles mine located
            85 km northwest of Thunder Bay, Ontario. The mine is Canada’s only primary
            producer of platinum group metals (“PGM”). In addition to palladium, the Company
            earns substantial revenue from by-product nickel, platinum, gold and
            copper.
            Palladium’s primary use continues to be in the auto industry where it is an
            important component in controlling exhaust emissions as mandated by stringent
            hydrocarbon emission standards for cars, light trucks and SUVs, particularly
            in
            the United States, Europe and Japan. In addition, palladium is consumed
            in the
            dental, electronics, jewelry and chemical sectors.
  The
          Company commenced the development of an underground mine at its Lac des
          Iles
          operation in the second quarter of 2004, which was completed in March 2006.
          Capital costs for the underground development were $36 million for direct
          and
          indirect costs (on budget). Mining equipment accounted for an additional
          $10
          million of capital costs. The Company is financing this equipment through
          a
          vendor lease program. The Company began full production from the underground
          operations on April 1, 2006 and effective this date the production from
          the
          underground operations has been reflected in the operating results of the
          Company. The underground production for the nine months averaged 2,245
          tonnes
          per day with an average palladium grade of 5.96 grams per tonne (during
          the
          fourth quarter 2,418 tonnes per day, with an average palladium grade of
          6.42
          grams per tonne), which was in line with expectations.
  In
          2006
          the Company continued its exploration of the Offset High Grade Zone at
          the Lac
          des Iles mine. Work has now commenced on an exploration drift from the
          current
          underground development to expedite further definition drilling in the
          zone, in
          order to better define and increase confidence within the upper portion
          of the
          Offset High Grade Zone. This Zone remains open along strike and down dip.
  On
            December 3, 2003, the Company entered into an option and joint venture
            agreement
            with Inco Limited on the Haines-Conacher properties, located approximately
            100
            km southwest of the Lac des Iles Mine in Ontario, which surrounds the
            past
            producing Shebandowan mine. The agreement was amended on March 31, 2006
            to
            include the mine.
 Successive
          diamond drilling programs in 2005 and 2006 warrant follow up on three relatively
          shallow mineralized zones known as the West, Road and “D” zones. A National
          instrument 43-101 compliant report on resources by a third party is in
          progress.
  Management
          believes that the mining and trucking of small tonnages daily of the high
          nickel-in-sulphide type mineralization to the Lac des Iles mill could have
          beneficial impacts on cash flow and life of mine projections for the Lac
          des
          Iles operation.
  
 3
  
  On
            October 18, 2005, the Company announced that it had entered into a letter
            of
            intent with Gold Fields Limited to further explore and develop a mining
            operation at the Arctic Platinum Project (“APP”) located in Finland. The formal
            option and joint venture agreement was signed on March 24, 2006. The
            APP
            includes several advanced stage PGM Projects. The Company has been granted
            an
            option to earn up to a 50% and, in certain circumstances, a 60% interest
            in APP
            and become project operator. In order to exercise the option and create
            a joint
            venture, the Company must spend US$12.5 million, complete a feasibility
            study
            and make a production decision as well as paying Gold Fields US$36 million
            or
            US$45 million to earn a 50% or 60% interest, respectively, through the
            issuance
            of the Company’s common shares (approximately 7.3 million shares or 9.2 million
            shares as the case may be) on or before August 31, 2008.
  The
              Company commenced work on the APP late in the first quarter of 2006.
              Three
              drills were mobilized into the Narkaus area to commence exploration
              and infill
              drilling on the Siika Kama, Kuohunki and Nutturalampi targets. Forty
              nine holes
              totalling 8,716 meters were drilled and the results were released on
              October 30,
              2006. These results will be incorporated into the re-scoping study.
              At Suhanko,
              which was the subject of the 2005 feasibility carried out by Gold Fields,
              updated resource models are underway. The Company has contracted Aker
              Kvaerner
              ASA to complete the APP re-scoping study and P&E Mining Consultants Inc. to
              conduct the open pit designs and optimization. The Company expects
              the
              re-scoping study to be completed in the second quarter of 2007.
 On
            September 29, 2005, the Company entered into an option and joint venture
            agreement with URSA Major Minerals Incorporated (“URSA”) on the Shakespeare
            nickel, copper, PGM property located near Sudbury, Ontario. In March
            2006, URSA
            presented to the Company the completed feasibility study on a contemplated
            open-pit mine and 4,500 tonne per day concentrator. Although the feasibility
            study was positive, the rate of return indicated in the study did not
            meet the
            Company’s investment criteria and, consequently, the Company terminated its
            involvement in the project in September 2006.
  Currently,
          the Company is delivering and selling all of its palladium production into
          the
          spot market with one or more commodity dealers and manufacturers. For 2006
          the
          Company realized a weighted average cash price of US$319 per ounce on its
          delivery of palladium into the spot market. The Company expects the improvement
          in the palladium price to continue (average price of US$320 per ounce for
          2006,
          in comparison to US$201 per ounce average for 2005) with the forecasted
          increasing global demand for palladium, the wide market price spread between
          platinum and palladium and increasing demand for palladium jewelry, all
          of which
          should accelerate consumption of palladium.
 4
 
 **London
          Palladium Cash Price US$/Troy Oz**
 Dec.
          28,
          2001 - Dec. 28, 2006
  ****
  **Last:
          $323.50 Dec. 28, 06**
  The
          Company does not currently have any commodity or foreign exchange hedging
          or
          other derivative instruments. In prior periods the Company hedged the price
          of
          its palladium production under a contract with a major automotive manufacturer
          (the “Palladium Sales Contract”). The hedge price was based on the monthly
          average spot price for palladium with a floor price of US$325 per ounce
          for 100%
          of production. The Palladium Sales Contract for physical deliveries expired
          on
          June 30, 2005. For 2005 all palladium production (except 6,403 ounces delivered
          under the Palladium Sales Contract) was delivered into either a sales contract
          with a leading catalytic converter manufacturer or a global commodity dealer.
          These contracts provided for pricing at either the monthly average price
          in the
          month prior to delivery of palladium or the spot price on the day of delivery.
          These contracts expired on December 31, 2005 and currently the Company
          is
          selling its monthly palladium production into the spot market.
  In
          2004,
          the Company adopted a hedging strategy for a portion of its by-product
          metal
          production that it implements from time to time. The objective of this
          hedging
          strategy was to reduce the variability of cash flow associated with revenues
          derived from the sale of nickel, platinum, gold and copper. The Company
          used
          fixed-price forward platinum contracts and cash settled gold, nickel and
          copper
          price swap contracts to insulate its earnings and cash flows from changes
          in
          these metal prices. These contracts allow the Company to sell its platinum
          production to credit-worthy metal dealers at a fixed price under the forward
          sales contract. In the case of gold, nickel and copper, the Company received
          a
          fixed metal price in exchange for paying the floating price received under
          its
          physical sales contracts to acceptable counterparts under the metal price
          swap
          contracts. In October 2005, the Company made a decision to unwind various
          by-product metal hedges namely, platinum, gold, and nickel through the
          buy-back
          of forward sales or cash settled metal price swaps. This decision was taken
          to
          reposition the Company’s exposure to its by-product metals in advance of the
          expected increase in metal production at Lac des Iles in 2006. During 2006,
          the
          Company chose to sell into the spot market and not hedge any of its by-product
          metal production.
 5
  
  **Production
                    Statistics**Year
                    Ended December 31
                
                **2006**
                
                2005
                
                2004Palladium
                    (oz)
                
                
                **237,338**
                
                
                177,167
                
                
                308,931Payable
                    Palladium (oz)
                
                
                **217,022**
                
                
                161,469
                
                
                281,743Platinum
                    (oz)
                
                
                **22,308**
                
                
                18,833
                
                
                25,128Gold
                    (oz)
                
                
                **17,237**
                
                
                14,308
                
                
                25,679Copper
                    (lbs)
                
                
                **5,155,588**
                
                
                5,514,670
                
                
                7,836,183Nickel
                    (lbs)
                
                
                **2,721,042**
                
                
                2,353,227
                
                
                4,320,970
 Ore
                    Tonnes Milled
                
                
                **4,570,926**
                
                
                4,780,599
                
                
                5,298,544Ore
                    Tonnes Mined - Underground
                
                
                **721,179**
                
                
                -
                
                
                -Ore
                    Tonnes Mined - Open Pit
                
                
                **3,926,911**
                
                
                3,705,555
                
                
                4,574,134Waste
                    Tonnes Mined - Open Pit
                
                
                **8,888,037**
                
                
                11,619,658
                
                
                12,275,889Waste
                    Strip Ratio
                
                
                **2.26:1**
                
                
                3.14:1
                
                
                2.68:1
 
 **Selected
                    Annual Information**(thousands
                    of Canadian dollars, except per share amounts)
                
                **2006**
                
                2005
                
                2004Revenue
                    from metal sales
                
                $
                **159,200**
                
                $
                92,606
                
                $
                185,204Net
                    loss
                
                
                **(34,109**
                **)**
                
                (53,611
                )
                
                (92,110
                )Less:Exploration
                    expense
                
                
                **(11,831**
                **)**
                
                (7,927
                )
                
                (2,479
                )Amortization
                
                
                **(30,103**
                **)**
                
                (18,297
                )
                
                (36,296
                )Accretion
                    of convertible notes
                
                
                **(10,090**
                **)**
                
                -
                
                
                -Write-down
                    of mining interests
                
                
                **-**
                
                
                -
                
                
                (108,000
                )Other
                    non-cash items1
                
                
                **(4,231**
                **)**
                
                2,546
                
                
                127Net
                    income (loss) before exploration and non-cash items1
                
                
                **22,146**
                
                
                (29,933
                )
                
                54,538Basic
                    net loss per share (dollars)
                
                
                **(0.65**
                **)**
                
                (1.03
                )
                
                (1.79
                )Cash
                    dividends declared
                
                
                **nil**
                
                
                nil
                
                
                nilCash
                    flow from operations prior to changesin
                    non-cash working capital
                
                
                **10,315**
                
                
                (37,860
                )
                
                52,059Total
                    assets
                
                
                **265,012**
                
                
                238,357
                
                
                297,897Long-term
                    debt, including current portion
                
                $
                **74,906**
                
                $
                46,272
                
                $
                50,171
  **Summary
                        of Quarterly Results**(thousands
                        of Canadian dollars,
                    
                    
                    
                    
                    
                    
                    
                    2005
                    
                    
                    
                    
                    
                    **2006**except
                        per share amounts)
                    
                    Q1
                    
                    Q2
                    
                    Q3
                    
                    Q4
                    
                    **Q1**
                    
                    **Q2**
                    
                    **Q3**
                    
                    **Q4**Revenue
                        from metal sales
                    
                    
                    26,206
                    
                    
                    23,544
                    
                    
                    17,247
                    
                    
                    25,609
                    
                    
                    **31,492**
                    
                    
                    **35,519**
                    
                    
                    **41,431**
                    
                    
                    **50,758**Cash
                        flow from operations,prior
                        to changes in non-cash
 working
                        capital *
                    
                    
                    (3,963
                    )
                    
                    (9,900
                    )
                    
                    (17,105
                    )
                    
                    (6,892
                    )
                    
                    **(362**
                    **)**
                    
                    **(3,105**
                    **)**
                    
                    **2,758**
                    
                    
                    **11,024**Exploration
                        expense
                    
                    
                    843
                    
                    
                    1,662
                    
                    
                    1,721
                    
                    
                    3,701
                    
                    
                    **2,024**
                    
                    
                    **2,659**
                    
                    
                    **2,576**
                    
                    
                    **4,572**Net
                        loss
                    
                    
                    (7,736
                    )
                    
                    (15,228
                    )
                    
                    (19,610
                    )
                    
                    (11,037
                    )
                    
                    **(4,141**
                    **)**
                    
                    **(11,325**
                    **)**
                    
                    **(11,247**
                    **)**
                    
                    **(7,396**
                    **)**Net
                        loss per share
                    
                    
                    (0.15
                    )
                    
                    (0.29
                    )
                    
                    (0.37
                    )
                    
                    (0.21
                    )
                    
                    **(0.08**
                    **)**
                    
                    **(0.22**
                    **)**
                    
                    **(0.21**
                    **)**
                    
                    **(0.14**
                    **)**Fully
                        diluted net loss per share
                    
                    
                    (0.15
                    )
                    
                    (0.29
                    )
                    
                    (0.38
                    )
                    
                    (0.21
                    )
                    
                    **(0.08**
                    **)**
                    
                    **(0.22**
                    **)**
                    
                    **(0.21**
                    **)**
                    
                    **(0.14**
                    **)**
  *
            includes exploration expense
 
 6
  
  **RESULTS
          OF OPERATIONS**
 The
                Company realized a net loss in 2006 of $34.1 million or $0.65 per
                share on
                revenues of $159.2 million compared to the net loss of $53.6 million
                or $1.03
                per share on revenues of $92.6 million in 2005. The improvement in
                operating
                results compared to 2005, is primarily due to increased revenue being
                realized
                from higher palladium (34% increase) and by-product production, as
                well as the
                higher average prices for palladium and all by-product metals. Revenue
                in 2006
                from the sale of palladium was $75.6 million compared to $43.4 million
                in 2005.
                For 2006 revenue from palladium sales was realized at an average
                of US$319 per
                ounce in comparison to the average of US$230 in 2005. This improvement
                supports
                the Company’s expectations regarding the improvement in the palladium price.
                The
                Company believes that the increasing global demand for palladium,
                the wide
                market price spread between platinum and palladium and increasing
                demand for
                palladium jewelry should accelerate consumption of palladium and
                expects that
                this improvement will be sustained and continue upward. Palladium
                production
                sold to a third-party smelter takes six months from the time of receipt
                at the
                smelter to settle the final delivery and pricing.
  By-product
            metal pricing also continued to strengthen throughout 2006. However,
            this was
            offset to some degree by the stronger Canadian dollar. Revenue from by-product
            metal sales increased by 70% to $83.6 million in 2006 compared to $49.2
            million
            in 2005 reflecting increased production, as well as the improved price
            levels
            for all by-products. Realized prices for by-product metals in 2006 compared
            to
            2005, were platinum at US$1,140 per ounce (2005 - US$815), nickel at
            US$11.68
            per lb (2005 - US$6.60), gold at US$610 (2005 - US$442) and copper at
            US$3.02
            per lb (2005 - US$1.50). Partially offsetting the higher realized metal
            prices
            was a strengthening Canadian dollar, which averaged US$0.88 in 2006,
            compared to
            US$0.83 in 2005.
  During
            2006, the mill processed 4,570,926 tonnes of ore or an average of 12,523
            tonnes
            per day, producing 237,338 ounces of palladium compared to 4,780,599
            tonnes of
            ore or an average of 13,097 tonnes per day, producing 177,167 ounces
            of
            palladium in 2005. In 2006, the average palladium head grade was 2.18
            grams per
            tonne compared to 1.66 grams per tonne in 2005. The improved head grade
            can be
            attributed to production from the underground mine, which commenced commercial
            production in April 2006. During the nine months ended December 31, 2006,
            617,634 tonnes of ore were extracted from the underground mine, with
            an average
            palladium grade of 5.96 grams per tonne. For 2006, the palladium recoveries
            were
            74.0% as compared to 69.6% in 2005. This improvement was achieved through
            continued progress in improving the throughput and availability of the
            mill by
            addressing and systematically resolving previously identified issues.
            These
            included flotation circuit improvements, implementation of proactive
            preventative maintenance programs, changes made to the mill flow sheet,
            reagent
            mix and the quality of recycled water.
  Total
            production costs for 2006 of $112.5 million increased from the $99.3
            million in
            the prior year. However, unit cash costs to produce palladium (production
            costs
            including overhead and smelter treatment, refining and freight costs),
            net of
            by-product metal revenues and royalties, decreased to US$201 per ounce
            in 2006
            compared to US$359 per ounce in 2005. The decrease in unit cash costs
            was caused
            by a combination of improved ore grades and metal recoveries, which led
            to a 34%
            increase in palladium production to 237,338 ounces in 2006 compared to
            177,167
            ounces in 2005, combined with the 70% increase in revenue from by-product
            metals. In addition, throughout the year there was a decrease in the
            open pit
            waste to ore strip ratio of 2.26:1 in 2006, compared to 3.14:1 in 2005.
            However,
            there continues to be pressure on costs, particularly steel, tires, power
            and
            diesel fuel.
  
 7
  
 
 In
            2004,
            the Company included in income from mining operations $7.1 million it
            received
            as an interim payment against a claim filed with its insurance company
            relating
            to losses incurred in connection with the failure of the primary crusher
            in
            2002. There were no further settlements received in 2005 or 2006. However,
            the
            Company is continuing to pursue the balance of the insurance claim and
            will
            record any additional recovery in income if and when received.
  The
            Company reviews and evaluates its long-lived assets for impairment when
            events
            or changes in circumstances indicate that the related carrying amounts
            may not
            be recoverable. Impairment is considered to exist if total estimated
            future
            undiscounted cash flows are less than the carrying amount of the asset.
            Future
            cash flows are estimated based on quantities of recoverable minerals,
            expected
            palladium and other commodity prices and expected foreign exchange rates
            (considering current, historical and expected future prices and foreign
            exchange
            rates and related factors), production levels and cash costs of production
            and
            future capital and reclamation expenditures, all based on life-of-mine
            plans and
            projections. The term “recoverable minerals” refers to the estimated amount of
            palladium and other commodities that will be obtained from proven and
            probable
            reserves after taking into account losses during mining, ore processing
            and
            concentrate treatment.
  During
            the first quarter of 2006, the ultimate pit design implemented in 2004
            was
            changed to an interim pit design that addressed previously disclosed
            south pit
            wall instability issues. The Company engaged an independent geotechnical
            consultant to review the slope stability issues and his recommendations
            were
            used by P&E Mining Consultants in designing a reconfigured open pit. The
            Company then commenced a detailed review of its life-of-mine operating
            plan for
            the Lac des Iles mine. As a result of the review a revised mine plan
            has been
            adopted and the carrying value of the Company’s mining interests have been
            reviewed based upon this revised mine plan. The Company’s management believes an
            impairment charge and a corresponding reduction in the carrying value
            of its
            mining interests is not required.
  The
            impairment test completed during the fourth quarter of 2004, resulted
            in a
            non-cash charge of $108.0 million (net of tax - $103.4 million or $2.01
            per
            share) to write down the carrying value of mining interests. An assessment
            of
            impairment was required as a result of changes in key assumptions (refer
            to note
            5(c) to the Financial Statements) which were primarily affected by a
            continuation of low palladium prices and a weakening U.S. dollar.
  Assumptions
            underlying future cash flow estimates are subject to risk and uncertainty.
            Any
            differences between significant assumptions and market conditions such
            as metal
            prices, exchange rates, recoverable metal, and/or the Company’s operating
            performance could have a material effect on the Company’s ability to recover the
            carrying amounts of its long-lived assets resulting in possible additional
            impairment charges.
  Non-cash
            amortization increased to $30.1 million in 2006 compared to $18.3 million
            in
            2005. The higher amortization is attributable to the 34% increase in
            palladium
            production. As well, amortization of the investment in the underground
            development costs commenced with commercial production in April 2006.
            The asset
            impairment charge that was recorded in 2004, lowered the book value of
            mining
            interests and resulted in a reduction in the unit of production amortization
            rate for subsequent years.
  Exploration
            expense increased to $11.8 million in 2006 compared to $7.9 million in
            2005.
            Included in 2006 is $6.8 million spent on exploration on the APP as the
            Company
            continues its activities in Finland.
  
 8
  
  Costs
            associated with the APP project are being charged to exploration expense
            as they
            occur. If it is determined that the project can be economically developed,
            these
            costs will begin to be capitalized. In addition, the Company continued
            its
            exploration of the Offset High Grade Zone at the Lac des Iles mine, where
            in
            November, work commenced on the exploration drift in order to expedite
            further
            definition drilling in this zone in the first quarter of 2007, as well
            as the
            Shebandowan nickel, copper project.
  For
            2006,
            there was an $18.1 million loss from mining operations compared to a
            $55.8
            million loss from mining operations in 2005. This improvement in earnings
            was
            mainly attributable to the 34% increase in production, as well as the
            improved
            pricing for palladium, where sales was realized at an average of US$319
            per
            ounce for 2006, in comparison to the 2005 average of US$230. In addition
            there
            were similar increases in the volumes of by-product metals, along with
            the
            improved pricing for all by-products.
  Other
            income and expense, which includes interest income and expense, accretion
            expense on the convertible note and foreign exchange gains and losses,
            was an
            expense of $17.4 million in 2006 compared to $0.7 million in 2005. The
            increase
            in 2006 was mainly due to the recognition of non-cash accretion expenses
            of
            $10.1 million relating to the convertible notes that were issued in 2006.
            For
            2006, the Company incurred interest expense on long-term debt of $5.0
            million
            compared to $2.5 million in 2005. The increased interest expense in 2006
            was
            attributable to the increase in interest rates year-over-year as well
            as the
            additional interest expense incurred on the convertible notes that commenced
            in
            April, 2006. To date, this expense of $2.0 million has been settled with
            the
            issue of common shares (242,158 shares), pursuant to the elections made
            by the
            convertible note holders. In 2006 there was a foreign exchange loss of
            $1.8
            million compared to a gain of $0.3 million in 2005. The foreign exchange
            loss
            relates primarily to the Company’s US dollar denominated credit facilities and
            the convertible notes. Interest income for 2006 declined to $0.8 million
            from
            $1.6 million in 2005 as a result of a lower average cash position in
            2006.
  For
            the
            year ended December 31, 2006, the Company reported a net loss of $34.1
            million
            or $0.65 per share compared to net loss of $53.6 million or $1.03 per
            share for
            the year ended December 31, 2005.
  **LIQUIDITY
            AND CAPITAL RESOURCES**
 Cash
            provided by operations (prior to changes in non-cash working capital)
            was $10.3
            million in 2006, compared to cash used in operations of $37.9 million
            in 2005.
            The $48.2 million improvement in operating cash flow 1 was
            mainly attributable to the 34% increase in palladium production, as well
            as the
            improved pricing for palladium. In addition there were similar increases
            in the
            volumes of by-product metals, along with the improved pricing for all
            by-products that resulted in a 70% increase in by-product revenues. This
            improved revenue more than offset increased operating costs. The increase
            in
            costs was mainly due to the start up of commercial levels of production
            for the
            underground operation and the expensing of the related operating costs,
            beginning in April 2006. Changes in non-cash working capital required
            $44.1
            million of cash in the 2006 as compared to providing $29.6 million in
            2005.
            Palladium awaiting settlement increased to 129,496 ounces at December
            31, 2006
            compared to 65,905 ounces at December 31, 2005. The increase in the physical
            quantity of metal in the concentrate awaiting settlement combined with
            the
            higher palladium and by-product prices used to value the concentrate
            awaiting
            settlement resulted in a $44.6 million (119%) increase in the value of
            concentrate awaiting settlement. After allowing for non-cash working
            capital
            changes, cash used by operations was $33.8 million in 2006 compared to
            $8.3
            million in 2005.
  Investing
            activities required $19.4 million of cash in 2006, the majority of which
            was
            attributable to the ongoing lateral development for the underground mine
            and the
            2006 expansion of the tailings management facilities. This compares with
            $35.4
            million of net investing activities in 2005, where the two major projects
            undertaken were the upgrade of the tailings management facility for $5.8
            million
            and the ongoing underground mine development, which required $23.9 million
            excluding $6.5 million of mining equipment purchased under capital leases.
  
 9
  
  The
            Company’s debt position increased to $74.9 million at December 31, 2006 compared
            to $46.3 million at December 31, 2005, due to the issuance of US$48.5
            million
            principal amount of convertible notes in 2006.
  On
            March
            29, 2006, the Company closed the first tranche (Series I notes) of a
            private
            placement of US$35.0 million principal amount of convertible notes. The
            transaction was with two purchasers, Kaiser Francis Oil Company (“KFOC), the
            Company’s largest shareholder, and an institutional investor. The Series I
            convertible notes bear interest at 6.5% per annum and mature on August
            1, 2008.
            The principal amount of the notes can be converted into common shares
            of the
            Company at US$12.18 (2,873,563 common shares) and also have attached
            warrants
            which can be exercised to purchase 1,436,782 common shares at US$13.48
            until
            March 29, 2010.
  Under
            the
            terms of the private placement, the Company had the right to sell to
            KFOC up to
            US$13.5 million principal amount of convertible note on or before June
            30, 2006,
            the proceeds of which were to be used to repay the loan outstanding under
            the
            KFOC standby credit facility. The Company exercised this right and on
            June 23,
            2006 issued US$13.5 million principal amount of Series II convertible
            note to
            KFOC to repay the outstanding credit facility. The Series II note bears
            interest
            at 6.5%, matures on December 1, 2008 and is convertible into 1,108,374
            common
            shares of the Company at US$12.18 per share. Warrants exercisable to
            purchase
            554,187 common shares of the Company were issued with the Series II note,
            with
            each warrant being exercisable to purchase one common share at US$13.48
            per
            share until June 23, 2010.
  The
            purchasers of the Series I notes had the option to acquire an additional
            US$10.0
            million aggregate principal amount of convertible notes (Series III)
            on or
            before December 31, 2006 but elected not to exercise this option.
  The
            Company has the right to defer any principal repayments in cash until
            a later
            principal repayment date. There is no limit on the length of the deferral,
            other
            than it cannot be deferred later than the final maturity date. The Company
            must
            give five days notice of its intention to defer. For the principal repayment
            due
            April 1, 2007 on the Series I notes, both Purchasers have indicated their
            intention to accept repayment in shares.
  On
            October 12, 2006 the Company obtained from KFOC a US$5.0 million short
            term
            working capital loan maturing December 31, 2006. The interest rate under
            the
            loan is the 30-day LIBOR plus 2.5% per annum. The Company paid a commitment
            fee
            of US$37,500 and amounts not drawn under the loan are 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 on 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 Company had drawn down
            US$5.0
            million (2005 nil).
  As
            at
            December 31, 2006, the Company had cash of approximately $3.2 million
            (December
            31, 2005 -
            $15.0
            million) and working capital of $50.8 million (December 31, 2005 - $31.5
            million). The Company recognized that it would need to raise additional
            working
            capital to fund its expected operations over the next twelve months as
            the
            inventory of concentrate awaiting settlement continues to increase and
            as the
            lateral development of the underground mine continues. To meet this need
            the
            Company entered into a platinum and palladium purchase agreement with
            Auramet
            Trading, LLC by which the Company may at its election receive advance
            payments
            not exceeding at any time, an aggregate maximum amount of US$25.0 million.
  
 10
  
  On
              February 27, 2007 the Company also completed a private placement of
              550,000 flow
              through common shares at $11.00 per share for gross proceeds of $6.05
              million.
              The underwriter of the private placement was Dundee Securities Corporation
              which
              received a 6% commission. The gross proceeds will be used to expedite
              work on
              the Shebandowan Project. The Company is continuing to review various
              other
              options to raise additional funds.
  **CONTRACTUAL
                        OBLIGATIONS**As
                        at December 31, 2006
                    
                    
                    
                    
                    
                    Payments
                        Due by Period(thousands
                        of Canadian dollars)
                    
                    Total
                    
                    1
                        Year
                    
                    1
                        -
                        3 Years
                    
                    4
                        -
                        5 YearsSenior
                        credit facility
                    
                    $
                    17,654
                    
                    $
                    6,662
                    
                    $
                    10,992
                    
                    $
                    -Kaiser-Francis
                        credit facility
                    
                    
                    5,827
                    
                    
                    5,827
                    
                    
                    -
                    
                    
                    -Capital
                        lease obligations
                    
                    
                    6,215
                    
                    
                    2,104
                    
                    
                    3,648
                    
                    
                    463Convertible
                        notes payable
                    
                    
                    45,210
                    
                    
                    22,148
                    
                    
                    23,062
                    
                    
                    -Interest
                        obligations
                    
                    
                    2,859
                    
                    
                    1,273
                    
                    
                    1,540
                    
                    
                    46Operating
                        leases
                    
                    
                    4,695
                    
                    
                    1,713
                    
                    
                    2,095
                    
                    
                    887Other
                        purchase obligations
                    
                    
                    1,351
                    
                    
                    1,351
                    
                    
                    -
                    
                    
                    -$
                    83,811
                    
                    $
                    41,078
                    
                    $
                    41,337
                    
                    $
                    1,396
  There
            are
            no payments due after five years.
  **RELATED
            PARTY TRANSACTIONS**
 In
              December 2001, Kaiser-Francis provided a US$20.0 million non-revolving
              credit
              facility to finance the Company’s working capital requirements. In the second
              quarter of 2004, the Kaiser-Francis credit facility was extended to
              June 30,
              2006. Interest was based on the 30-day LIBOR plus 2.50% and the stand-by
              fee was
              0.125% per annum. The amount paid to Kaiser-Francis for interest and
              stand-by
              fee on this facility was $0.6 million in 2006 compared to $0.8 million
              in 2005.
              This facility was repaid on June 23, 2006 with the principal amount
              of the
              Series II convertible note issued on this date. On October 12, 2006
              the Company
              obtained from KFOC a US$5.0 million short term working capital loan
              maturing
              December 31, 2006. On December 13, 2006, the maturity date was extended
              to March
              31, 2007. Interest on this new facility is based on the 30-day LIBOR
              plus 2.5%
              and the stand-by fee is 0.125% per annum. Kaiser-Francis holds approximately
              50%
              of the common shares of the Company.
 The
            Company engaged Louis J. Fox in November, 1999, to provide services in
            connection with the negotiation of palladium end-user supply contracts.
            The
            services agreement was negotiated at arms-length prior to Mr. Fox becoming
            a
            director of the Company. Mr. Fox, now a former director, received a fee
            in
            connection with the negotiations related to the Palladium Sales Contract.
            The
            amount paid to Mr. Fox in 2006 was $nil compared to $0.2 million in 2005.
            The
            Palladium Sales Contract expired on June 30, 2005 and no further fees
            are
            payable to Mr. Fox in connection with this contract.
  **FOURTH
            QUARTER AND MANAGEMENT’S OUTLOOK**
 There
            is
            no apparent pattern of variability or seasonality affecting the Company’s
            operations. The principal drivers of the Company’s performance are its monthly
            production of PGM and by-product metals from its Lac des Iles mine and
            the
            corresponding world spot prices of such metals.
  
 11
  
 Production
                for the fourth quarter 2006 was 73,242 ounces of palladium with an
                average
                palladium head grade of 2.52 g/t. This was an improvement on the
                palladium
                production of 59,756 ounces in the third quarter and almost double
                the
                production of 36,833 ounces in 2005 with a headgrade of 1.47 g/t,
                during the
                same period. The improved head grade can be attributed to production
                from the
                underground mine, which, commencing in April 2006, is being recognized
                as
                revenue. During the fourth quarter, the underground mine averaged
                2,418 tonnes
                per day at an average head grade of 6.42 g/t. In addition, mill availability
                reached 90% during the quarter, about 10% above the same period last
                year,
                reflecting the determined efforts throughout the year to resolve
                the challenges,
                combined with the implementation of a proactive maintenance program.
                Overall,
                the net loss in the fourth quarter was $7.4 million. This was lower
                than the
                third quarter loss of $11.2 million, primarily due to increased revenue
                being
                realized from higher production as well as the higher average price
                for
                palladium, as well as for the by-product metals, and lower than the
                fourth
                quarter 2005 net loss of $11.0 million again mainly due to the higher
                production
                and realized prices.
 The
            underground mine commenced commercial production in April, 2006. The
            underground
            production for the nine months averaged 2,245 tonnes per day with an
            average
            palladium grade of 5.96 g/t (during the fourth quarter 2,418 tonnes per
            day,
            with an average palladium grade of 6.42 g/t), in line with expectations.
            Palladium production in 2007 is expected to continue to improve, with
            a full
            year of production from the underground and is expected to be approximately
            290,000 ounces as the average blended head grade is expected to increase
            in line
            with the historical averages of the mine.
  The
            Company’s aggressive exploration program will continue in 2007, with
            approximately $15.0 million being allocated to exploration activities.
            The main
            focus will continue to be on the APP in Finland with the preliminary
            scoping
            scheduled to be completed by the end of the first half of 2007. In addition,
            the
            Company will continue to focus on the further definition of the Offset
            High
            Grade Zone at Lac des Iles and projects such as the Shebandowan project.
            Finally, a key strategy moving forward will be to continue the pursuit
            of
            quality Ni/PGM opportunities.
  The
              Company believes that the surplus pressures of the early 2000’s have abated and
              the market has moved into a demand driven pricing environment. This
              is being
              evidenced by increasing global catalytic demand fueled by growing low
              tolerance
              emission legislation and rapid technological advances which exploit
              pricing
              differentials between palladium and platinum. With Russian exports
              more
              transparent and demand in the four major consumption areas increasing,
              demand
              likely will outpace supply over the long term.
  **CRITICAL
            ACCOUNTING POLICIES AND ESTIMATES**
 Critical
            accounting policies generally include estimates that are highly uncertain
            and
            for which changes in those estimates could materially impact the Company’s
            financial statements. The following accounting policies are considered
            critical:
  **(a)
            Impairment assessments of long-lived assets**
 Each
            year, the Company reviews the mining plan for the remaining life of mine.
            Significant changes in the mine plan can occur as a result of mining
            experience,
            mineral reserve estimates based on assessed geological and engineering
            analysis,
            new discoveries, changes in mining methods and production rates, process
            changes, investments in new equipment and technology, metal prices, estimates
            of
            future production costs and other factors. Based on year-end ore reserves
            and
            the current mine plan, the Company reviews annually its accounting estimates
            and
            makes adjustments accordingly.
  
 12
  
 The
              Company assesses long-lived assets for recoverability on an annual
              basis. When
              the carrying value of a long-lived asset is less than its net recoverable
              value
              as determined on an undiscounted basis, an impairment loss is recognized
              to the
              extent that its fair value, measured as the discounted cash flows over
              the life
              of the asset.
  Assumptions
              underlying future cash flow estimates are subject to risk and uncertainty.
              Any
              differences between significant assumptions and market conditions such
              as metal
              prices, exchange rates, recoverable metal, and/or the Company’s operating
              performance could have a material effect on the Company’s ability to recover the
              carrying amounts of its long-lived assets resulting in possible additional
              impairment changes.
  **(b)
              Amortization of mining interests**
 The
              Company amortizes a large portion of its mining interests using the
              unit of
              production method based on proven and probable reserves.
  **(c)
              Forward Metal Sales and Metal Price Swap Contracts**
 In
              the
              fourth quarter of 2003, the Company updated its hedge policy to allow
              for
              managing its exposure to market metal prices, particularly its platinum,
              gold,
              nickel and copper price exposure. With the adoption of this policy
              and from time
              to time, the Company will enter into forward metal sales or cash settled
              swaps
              to establish fixed metal prices in order to manage metal price volatility.
 The
            Company uses fixed-price forward platinum sales contracts and cash settled
            gold,
            nickel and copper price swap contracts to insulate its earnings and cash
            flows
            from changes in these metal prices. These contracts allow the Company
            to sell
            its platinum to credit-worthy metal dealers at a fixed price under the
            forward
            sales contract. In the case of gold, nickel and copper, the Company receives
            a fixed metal price in exchange for paying the floating price received
            under its physical sales contracts to acceptable counterparts under the
            metal
            price swap contracts. In October 2005, the Company made a decision to
            unwind
            various by-product metal hedges namely, platinum, gold, and nickel through
            the
            buy-back of forward sales or cash settled metal price swaps. This decision
            was
            taken to reposition the Company’s exposure to its by-product metals in advance
            of the expected increase in metal production at Lac des Iles in 2006.
  **(d)
            Revenue Recognition**
 Revenue
            from the sale of palladium and by-product metals is recognized net of
            royalties
            upon the delivery of concentrate to the smelter, which is when title
            transfers
            and the rights and obligations of ownership pass. The Company’s metals are sold
            under contracts that provide for final prices that are determined by
            quoted
            market prices in a period subsequent to the date of sale. Variations
            from the
            provisionally priced sales are recognized as revenue adjustments as they
            occur
            until the price is finalized. Provisional pricing is based upon market
            prices in
            the month of recognition. Concentrate awaiting settlement at the smelter
            is net
            of estimated treatment and refining costs.
  **(e)
            Mine Restoration Obligation**
 Asset
            retirement obligations are recognized when incurred and recorded as liabilities
            at fair value. The amount of the liability is subject to re-measurement
            at each
            reporting period. The liability is accreted over time through periodic
            charges
            to earnings. In addition, the asset retirement obligation is capitalized
            as part
            of mining interests and amortized over the estimated life of the mine.
            The
            estimated asset retirement obligation may change materially based on
            future
            changes in operations, costs of reclamation and closure activities, and
            regulatory requirements.
  
 13
  
 **RECENT
              ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT YET ADOPTED**
 **Financial
              Instruments - Recognition and Measurement**
 In
              January 2005, the CICA released new Handbook Section 3855, “Financial
              Instruments - Recognition and Measurement”, effective for annual and interim
              periods beginning on or after October 1, 2006. This new section establishes
              standards for the recognition and measurement of all financial instruments,
              provides a characteristics-based definition of a derivative financial
              instrument, provides criteria to be used to determine when a financial
              instrument should be recognized, and provides criteria to be used when
              a
              financial instrument is to be extinguished. The Company has not yet
              determined
              the effect that these new standards will have on its financial position and
              results of operations.
  The
              CICA
              has also reissued section 3860 of the CICA Handbook as section 3861,
              Financial
              Instruments -
              Disclosure and Presentation, which establishes standards for presentation
              of
              financial instruments and non financial derivatives and identifies
              the
              information that should be disclosed about them. The revisions come
              into effect
              for fiscal years beginning on or after October 1, 2006. The Company
              has not yet
              determined the affect these new standards will have on its financial
              position
              and results of operations.
  **COMPREHENSIVE
              INCOME AND EQUITY**
 In
              January 2005, the CICA released new Handbook Section 1530, “Comprehensive
              Income”, and Section 3251, “Equity”, effective for annual and interim periods
              beginning on or after October 1, 2006. Section 1530 establishes standards
              for
              reporting comprehensive income. These standards require that an enterprise
              present comprehensive income and its components, in a separate financial
              statement that is displayed with the same prominence as other financial
              statements. Section 3251 establishes standards for the presentation
              of equity
              and changes in equity during the reporting period. The requirements
              in Section
              3251 are in addition to Section 1530. The Company has not yet determined
              the
              effect that these new standards will have on its financial position
              and results
              of operations.
 **HEDGES**
 In
            January 2005, the CICA released new Handbook Section 3865, “Hedges”, effective
            for annual and interim periods beginning on or after October 1, 2006.
            This new
            section establishes standards for when and how hedge accounting may be
            applied.
            Hedge accounting is optional. The Company does not expect the adoption
            of this
            standard to have a material impact on its financial position and results
            of
            operations.
  **1** **NON-GAAP
            MEASURE**
 North
            American Palladium has included in this document non-GAAP performance
            measures
            for operating cash flows from operations prior to changes in non cash
            working
            capital, net income (loss) before exploration and non cash items and
            cash cost
            per ounce 1 .
            Management uses these measurements as a basis for determining results
            from the
            Lac des Iles mining activities. These non-GAAP measures do not have any
            standardized meaning nor are they necessarily comparable with similar
            measures
            presented by other companies. North American Palladium believes that
            certain
            investors use this information to evaluate the Company’s performance. This data
            is intended to provide additional information and should not be considered
            in
            isolation or as a substitute for measures of performance prepared in
            accordance
            with GAAP.
  
 14
  
 **Reconciliation
              of Cash Cost per Ounce** **1** **to Financial Statements**
 Year
                      Ended December 31(thousands
                        of dollars, except per ounce amounts)
                    
                    
                    **2006**
                    
                    
                    2005Production
                        costs including overhead
                    
                    **$**
                    **112,458**
                    
                    $
                    99,322Smelter
                        treatment, refining and freight costs
                    
                    
                    **15,438**
                    
                    
                    15,777**127,896**
                    
                    
                    115,099Less:
                        by-product metal revenue
                    
                    
                    **(83,556**
                    **)**
                    
                    (49,208
                    )**44,340**
                    
                    
                    65,891Divided
                        by ounces of palladium
                    
                    
                    **193,067**
                    
                    
                    154,196Cash
                        cost per ounce1(Cdn$)
                    
                    
                    **230**
                    
                    
                    427Cdn$
                        exchange rate
                    
                    
                    **1.14072**
                    
                    
                    1.19062Cash
                        cost per ounce1(US$)
                    
                    
                    **201**
                    
                    
                    359
 
 **Reconciliation
              of Cash Flow from Operations, Prior to Changes in Non Cash Working
              Capital
              (Operating Cash Flow** **1** **)
              to Financial Statements**
  Year
                      Ended December
                      31(thousands
                      of dollars)
                    
                    
                    **2006**
                    
                    
                    2005
                    
                    
                    2004Operating
                        Cash Flow1
                    
                    **$**
                    **10,315**
                    
                    $
                    (37,860
                    )
                    $
                    52,059Changes
                        in Non-cash Working Capital
                    
                    
                    **(44,104**
                    **)**
                    
                    29,587
                    
                    
                    29,731Cash
                        Provided by Operating Activities
                    
                    **$**
                    **(33,789**
                    **)**
                    $
                    (8,273
                    )
                    $
                    81,790
 
 **OTHER
              INFORMATION**
 Additional
              information regarding the Company is included in the Company’s Annual
              Information Form and Annual Report on Form 40-F which are filed with
              the
              Canadian securities regulators and the United States Securities and
              Exchange
              Commission, respectively. A copy of the Company’s Annual Information Form is
              posted on the SEDAR website at www.sedar.com. A copy of the Annual
              Report or
              Form 40-F can be obtained from the United States Securities and Exchange
              Commission’s website at www.sec.gov.
  **OUTSTANDING
              SHARE DATA**
 As
                of
                March 20, 2007 there were 53,595,398 common shares of the Company
                outstanding
                and options outstanding pursuant to the 1995 Corporate Stock Option
                Plan
                entitling holders thereof to acquire 313,633 common shares of the
                Company at an
                average strike price of $7.91.
 **RISKS
            AND UNCERTAINTIES**
 The
            price
            of palladium is the most significant factor influencing the profitability
            of the
            Company. In 2006, sales of palladium accounted for approximately 48%
            (2005 -
            approximately 47%) of the Company’s revenue. Many factors influence the price of
            palladium, including global supply and demand, speculative activities,
            international political and economic conditions and production levels
            and costs
            in other PGM producing countries, particularly Russia and South Africa.
            The
            possible development of a substitute alloy or synthetic material, which
            has
            catalytic characteristics similar to platinum group metals, may result
            in a
            future decrease in demand for palladium and platinum.
  Currency
            fluctuations may affect cash flow since production currently is sold
            in United
            States dollars, whereas the Company’s administration, operating and exploration
            expenses are incurred mainly in Canadian dollars. As a result, changes
            in the
            exchange rate between Canadian and United States dollars can affect revenue
            and
            profitability.
  
 15
  
 The
              Company is dependent on one mine for its metal production. The business
              of
              mining is generally subject to risks and hazards, including environmental
              hazards, industrial accidents, metallurgical and other processing problems,
              unusual and unexpected rock formations, pit slope failures, flooding
              and
              periodic interruptions due to inclement weather conditions or other
              acts of
              nature, mechanical equipment and facility performance problems and
              the
              availability of materials and equipment. These risks could result in
              damage to,
              or destruction of, the Company’s properties or production facilities, personal
              injury or death, environmental damage, delays in mining, monetary losses
              and
              possible legal liability. Although the Company maintains insurance
              in respect of
              the mining operations that is within ranges of coverage consistent
              with industry
              practice, such insurance may not provide coverage of all the risks
              associated
              with mining. Currently the Company sells all of its concentrate to
              one
              smelting firm under a contract that expires on April 30, 2007. Management
              believes it will be successful in negotiating an extension and/or new
              agreement
              with the smelting firm, but cannot guarantee that this will occur.
  **DISCLOSURE
              CONTROLS AND PROCEDURES**
 Management
              is responsible for the information disclosed in this management’s discussion and
              analysis and has in place the appropriate information systems, procedures
              and
              controls to ensure that information used internally by management and
              disclosed
              externally is, in all material respects, complete and reliable. As
              of the
              financial year ended December 31, 2006, an evaluation was carried out
              under the
              supervision of, and with the participation of, the Company’s management,
              including the Chief Executive Officer and Chief Financial Officer,
              on the
              effectiveness of the Company’s disclosure controls and procedures. Based on that
              evaluation, the Chief Executive Officer and Chief Financial Officer
              concluded
              that the design and operation of these disclosure controls and procedures
              were
              effective as of December 31, 2006 to provide reasonable assurance that
              material
              information relating to the Company and its consolidated subsidiaries
              would be
              made known to them by others within those entities.
  **INTERNAL
              CONTROL OVER FINANCIAL REPORTING**
 As
              at the
              financial year ended December 31, 2006, the Chief Executive Officer
              and Chief
              Financial Officer certify that they have designed, or caused to be
              designed
              under their supervision, internal controls over financial reporting
              to provide
              reasonable assurance regarding the reliability of financial reporting
              and the
              preparation of the financial statements for external purposes in accordance
              with
              GAAP.
  There
              have been no changes in the Company’s internal control over the financial
              reporting that occurred during the most recent interim period ended
              December 31,
              2006 that have materially affected or are reasonably likely to materially
              affect, the Company’s internal control over financial reporting.
 For
            the
            Company, as with many other public companies not required to comply under
            SEC
            regulations in the United States, this requirement is the first major
            impact of
            Sarbanes Oxley regulations as they become adopted in Canada. Historically,
            we
            have been confident in our ability to report accurate financial information
            on a
            timely basis and we were comfortable that the control environment that
            existed
            to enable this reporting was sufficient and appropriate. The real impact
            of this
            requirement then is not to change our controls or the control environment
            but to
            require us to document the various forms that these controls take and
            provide a
            basis for measuring the effectiveness of these controls through regular
            audits
            that will need to begin in 2007. Our external auditors have not conducted
            a
            review or audit of the controls or the documentation relating to this
            initiative.
  
 16
  
 Forward-Looking
              Statements - Certain statements included in this 2006 annual report,
              financial
              statements for the year ended December 31, 2006 and management’s discussion and
              analysis are forward-looking statements which are made pursuant to
              the “safe
              harbor” provisions of the United States Private Securities Litigation Reform
              Act
              of 1995. They include estimates and statements that describe the Company’s
              future plans, objectives and goals, including words to the effect that
              the
              Company or management expects a stated condition or result to occur.
              When used
              herein, words such as “continue”, “proposed”, “appears”, “indicating”,
“predicting”, “estimate”, “expect”, “plan”, “should”, “may”, “will” and other
              similar expressions are intended to identify forward-looking statements.
              In
              particular statements relating to the estimated future metal prices,
              cash flows,
              expenses, capital costs, ore production, mine life, financing, construction
              and
              commissioning, and exploration prospects are forward-looking statements.
              Such
              forward-looking statements involve inherent risks and uncertainties
              and are
              subject to factors, many of which are beyond our control, that may
              cause actual
              results or performance to differ materially from those currently anticipated
              in
              such statements. Important factors that could cause actual results
              to differ
              materially from those expressed or implied by such forward-looking
              statements
              include among others metal price volatility, changes in the US/Cdn
              dollar
              exchange rate, economic and political events affecting metal supply
              and demand,
              fluctuations in ore grade, ore tonnes milled, geological, technical,
              mining or
              processing problems, recoverability of metals, future profitability
              and
              production, availability of financing on acceptable terms and unexpected
              problems during the development, construction and start-up phases of
              the
              underground mine. For a more comprehensive review of risk factors,
              please refer
              to the Company’s most recent Annual Report under “Management’s Discussion and
              Analysis of Financial Results” and Annual Information Form under “Risk Factors”
on file with the U.S. Securities and Exchange Commission and Canada
              provincial
              securities regulatory authorities. The Company disclaims any obligation
              to
              update or revise any forward-looking statements whether as a result
              of new
              information, events or otherwise. Readers are cautioned not to put
              undue
              reliance on these forward-looking statements.
 17




**A.**
            **Disclosure
                Controls and Procedures**





Disclosure
      controls and procedures are defined by the Securities and Exchange Commission
      as
      those controls and other procedures that are designed to ensure that information
      required to be disclosed by North American Palladium Ltd. (the "Registrant")
      in
      reports filed or submitted by it under the Securities Exchange Act of 1934,
      as
      amended, is recorded, processed, summarized and reported within the time periods
      specified in the Securities and Exchange Commission's rules and forms. The
      Registrant's Chief Executive Officer and Manager of Administration and Senior
      Controller and acting Chief Financial Officer have evaluated the Registrant's
      disclosure controls and procedures as of the end of the period covered by this
      Annual Report on Form 40-F and have determined that such disclosure controls
      and
      procedures are effective.





**B.**
            **Management's
                Annual Report on Internal Control over Financial****Reporting**





The
      following report is provided by management in respect of the Registrant's
      internal control over financial reporting:





1.
            Management
                of the Registrant is responsible for establishing and maintaining
                adequate
                internal control over financial reporting for the
                Registrant.


2.
            Management
                of the Registrant has used the Committee of Sponsoring Organizations
                of
                the Treadway Commission (COSO) framework to evaluate the effectiveness
                of
                the Registrant’s internal control over financial reporting. Management
                believes that the COSO framework is a suitable framework for its
                evaluation of the Registrant’s internal control over financial reporting
                because it is free from bias, permits reasonable consistent qualitative
                and quantitative measurements of the Registrant’s internal controls, is
                sufficiently complete so that those relevant factors that would alter
                a
                conclusion about the effectiveness of the Registrant’s internal controls
                are not omitted, and is relevant to an evaluation of internal control
                over
                financial reporting.


3.
            Management
                of the Registrant has assessed the effectiveness of the Registrant’s
                internal control over financial reporting, as at December 31, 2006,
                and
                has concluded that such internal control over financial reporting
                is
                effective. There are no material weaknesses in the Registrant’s internal
                control over financial reporting that have been identified by
                management.


4.
            KPMG
                LLP, which has audited the consolidated financial statements of the
                Registrant for the year ended December 31, 2006, has not issued an
                attestation report on management's assessment of the Registrant's
                internal
                control over financial reporting. Please see Section C,*Attestation
                Report of the Registered Public Accounting Firm*of
                this Annual Report.





**C.**
            **Attestation
                Report of the Registered Public Accounting
                Firm**





This
      Annual Report does not include an attestation report of the Registrant’s
      registered public accounting firm regarding internal control over financial
      reporting. Management’s report was not subject to attestation by the
      Registrant’s registered public accounting firm pursuant to temporary rules of
      the Securities and Exchange Commission (the "SEC") that permit the Registrant
      to
      provide only management’s report in this Annual Report.





**D.**
            **Changes
                in Internal Control Over Financial
                Reporting**





Since
      the
      most recent evaluation of the Registrant's internal control over financial
      reporting, there has not been any significant change in the Registrant's
      internal control over financial reporting that has materially affected or is
      reasonably likely to materially affect, the Registrant's internal control over
      financial reporting.





**E.**
            **Notice
                of Pension Fund Blackout Period**





The
      Registrant was not required by Rule 104 of Regulation BTR to send any notice
      to
      any of its directors or executive officers during the fiscal year ended December
      31, 2006.





**F.**
            **Audit
                Committee Financial Expert**





The
      Registrant's board of directors has determined that **** Mr.
      Gregory J. Van Staveren, an individual serving on the audit committee of the
      Registrant's board of directors, is an audit committee financial expert, as
      that
      term is defined in General Instruction B8(a) of Form 40-F. The Registrant's
      board of directors has also determined that Mr. Van Staveren is
      independent. ****










The
      Registrant discovered an inadvertent violation of Section 121 of the American
      Stock Exchange (“AMEX”) Registrant Guide in 2006. Mr. Van Staveren, has a
      brother who is a partner at KPMG LLP ("KPMG"), the Registrant's outside auditor.  As
      a
      result of Mr. Van Staveren’s brother’s affiliation with KPMG ,
      Mr.
      Greg Van Staveren is not
      independent within the meaning of Section 121A(f) of the AMEX
      Registrant Guide, which provides that a director who is, or has an immediate family member
      who is, a current partner of a listed Registrant's outside auditor is not
      independent.





Note
      5 to the Commentary to Section 121 of
      the
      AMEX Registrant Guide provides that foreign companies are permitted to follow home country
      practice in lieu of the audit committee requirements specified in Section 121
      in
      accordance with the provisions of Section 110, provided that such companies
      comply with Rule 10A-3 under the Exchange Act. The fact that Mr. Greg Van
      Staveren's brother is a partner at KPMG does not impair his independence under
      Rule 10A-3. Further, the Registrant was not in violation of the director
      independence and audit committee requirements under applicable Canadian
      requirements.





The
      Registrant made application to the AMEX for a waiver of the requirements of
      Section 121 of the AMEX Registrant Guide is this regard. The waiver was granted
      on March 10, 2006.





**G.**
            **Code
                of Ethics**





The
      Registrant’s board of directors has adopted a code of ethics that applies to all
      directors, officers and employees. The Registrant will provide a copy of the
      code of ethics without charge to any person that requests a copy by contacting
      the Corporate Secretary, at the address that appears on the cover of this Annual
      Report on Form 40-F.





**H.**
            **Principal
                Accountant Fees and
                Services**





***Audit
      Fees***





The
      aggregate fees billed by KPMG LLP (“KPMG”), the Registrant's external auditors
      for the fiscal year ended December 31, 2005 and 2006, for services that are
      normally provided by the external auditors in connection with statutory and
      regulatory filings or engagements for such years were Cdn$329,640 and
      Cdn$442,160, respectively.





***Audit-Related
      Fees***





The
      aggregate fees billed by KPMG for the fiscal years ended December 31, 2005
      and
      2006 for assurance and related services rendered by it that are reasonably
      related to the performance of the audit or review of the Registrant's financial
      statements for such years were Cdn$30,820 and Cdn$185,714
      respectively.





***Tax
      Fees***





The
      aggregate fees billed by KPMG for the fiscal years ended December 31, 2005
      and
      2006 for professional services rendered by it for tax compliance, tax advice,
      tax planning and other services were Cdn$12,075 and Cdn$39,503, respectively.
      Tax services provided included **** preparation
      of corporate tax returns and review of tax provisions.





***All
      Other Fees***





The
      aggregate fees billed by KPMG for the fiscal years ended December 31, 2005
      and
      2006 for products and services provided by KPMG, other than the services
      reported in the preceding three paragraphs, were Cdn$nil and Cdn$nil,
      respectively.





***Audit
      Committee Pre-Approval Policies***





All
      audit and non-audit services performed by the Registrant's auditor are
      pre-approved by the audit committee of the Registrant.










**I.**
            **Off-Balance
                Sheet Arrangements**





The
      Registrant is not a party to any off-balance sheet arrangements that have or
      are
      reasonably likely to have a current or future effect on its financial condition,
      changes in financial condition, revenues or expenses, results of operations,
      liquidity, capital expenditures or capital resources that is material to
      investors.





**J.**
            **Tabular****Disclosure****of Contractual Obligations**





The
      following table sets out the Registrant’s known contractual obligations for its
      long-term liabilities and lease commitments as of the fiscal year ended December
      31, 2006.




**Contractual
      Obligations**





As
                at December 31, 2006
            
            **Payments
                Due by Period**(thousands
                of dollars)
            
            Total
            
            1
                Year
            
            1
                -
                3 Years
            
            4
                -
                5 YearsSenior
                credit facility
            
            
            17,654
            
            
            6,662
            
            
            10,992
            
            
            --Kaiser-Francis
                credit facility
            
            
            5,827
            
            
            5,827
            
            
            --
            
            
            --Capital
                lease obligations
            
            
            6,215
            
            
            2,104
            
            
            3,648
            
            
            463Convertible
                notes payable
            
            
            45,210
            
            
            22,148
            
            
            23,062
            
            
            --Interest
                obligations
            
            
            2,859
            
            
            1,273
            
            
            1,540
            
            
            46Operating
                leases
            
            
            4,695
            
            
            1,713
            
            
            2,095
            
            
            887Other
                purchase obligations
            
            
            1,351
            
            
            1,351
            
            
            --
            
            
            --$
            83,811
            
            $
            41,078
            
            $
            41,337
            
            $
            1,396


There
      are
      no payments due after five years.





**K.**
            **Identification
                of Audit Committee**





The
      Registrant has an audit committee comprised of four individuals: Mr. Gregory
      Van
      Staveren, Mr. David Comba, Mr. Robert Quinn and Mr. Steven Berlin. . **** Mr.
      Comba and Mr. Quinn are independent as that term is defined under the rules
      and
      regulations of the AMEX. As described above in Item F, Mr. Van Staveren is
      not
      independent as that term is defined under the rules and regulations of the
      AMEX.
      Mr. Berlin is not a voting member of the audit committee and serves in the
      capacity of an observer. Mr. Berlin is not independent, as that term is defined
      under the rules and regulations of the AMEX, as, prior to December 31, 2005,
      he
      served as an executive officer of Kaiser Francis Oil Registrant, which owns
      approximately 50.0% of the outstanding common shares of the Registrant. Mr.
      Berlin does satisfy the requirements of Rule 10A-3 under the Exchange Act.
      Further, Mr. Berlin is a certified public accountant and has considerable
      experience in corporate finance.





**L.**
            **Critical
                Accounting Policies**





A
      discussion of the Registrant's critical accounting policies can be found in
      its
      Management's Discussion and Analysis for the year ended December 31, 2006 filed
      with the Commission as Document 4 herein.











**UNDERTAKING
      AND CONSENT TO SERVICE OF PROCESS**





**A.**
            **Undertaking**





The
      Registrant undertakes to make available, in person or by telephone,
      representatives to respond to inquiries made by the Commission staff, and to
      furnish promptly, when requested to do so by the Commission staff, information
      relating to: the securities registered pursuant to Form 40-F; the securities
      in
      relation to which the obligation to file an annual report on Form 40-F arises;
      or transactions in said securities.





**B.**
            **Consent
                to Service of Process**





The
      Registrant has previously filed with the Commission a Form F-X in connection
      with its Common Shares, no par value.







**SIGNATURE**





Pursuant
      to the requirements of the Exchange Act, the Registrant certifies that it meets
      all of the requirements for filing on Form 40-F and has duly caused this annual
      report to be signed on its behalf by the undersigned, thereto duly
      authorized.




**NORTH
              AMERICAN PALLADIUM LTD.**Dated:
              March 30, 2007
            By:
            /s/ James
              D.
              ExcellBy:James
              D. ExcellTitle:
              President and Chief Executive Officer







**EXHIBIT
      INDEX**





**Number**
            **Document**  1.
            Consent
                of KPMG LLP


31.
            Certification
                of CEO and Manager of Administration and Senior Controller and acting
                Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act
                of 2002


32.
            Certification
                of CEO and Manager of Administration and Senior Controller and acting
                Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
                Act
                of 2002