Exhibit 1.3

LOGO

North American Palladium Ltd.



Managements Responsibility

for Financial Statements

The accompanying
consolidated financial statements have been prepared by management in accordance with International Financial Reporting Standards (IFRS) as issued by the IASB. Financial statements include certain amounts based on estimates and judgments. When an
alternative method exists under IFRS, 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
IFRS. The financial information presented elsewhere in the annual report is consistent with that in the consolidated financial statements.

The Company
maintains adequate systems of internal accounting and administrative controls. Such systems are designed to provide reasonable assurance that transactions are properly authorized and recorded, the Companys assets are appropriately accounted
for and adequately safeguarded and that the financial information is relevant and reliable.

The Board of Directors of the Company is responsible for
ensuring that management fulfills its responsibilities for financial reporting, and is ultimately responsible for reviewing and approving the consolidated financial statements and the accompanying managements discussion and analysis. The Board
of Directors carries out this responsibility principally through its Audit Committee.

The Audit Committee is appointed by the Board of Directors and
all of its members are non-management directors. The Audit Committee meets periodically with management and the external auditors to discuss internal controls, auditing matters and financial reporting issues, and to satisfy itself that each party is
properly discharging its responsibilities. The Audit Committee also reviews the consolidated financial statements, managements discussion and analysis, the external auditors report, examines the fees and expenses for audit services, and
considers the engagement or reappointment of the external auditors. The Audit Committee reports its findings to the Board of Directors for its consideration when approving the consolidated financial statements for issuance to the shareholders. KPMG
LLP, the external auditors, have full and free access to the Audit Committee.

Toronto, Canada

February 21, 2013



|               |  |              
|-------------- |  | -------------
|LOGO           |  | LOGO         
|André Douchane |  | Dave Langille
|               | 
|Interim CEO    |  | CFO          



30

2012 Annual Report



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LOGO

North American Palladium Ltd.



|     |  |                           |  |  |  |           |  |               
|---- |  | ------------------------- |  |  |  | --------- |  | --------------
|LOGO |  |                           |  |  |  |           |  |               
|     |  | KPMG LLP                  |  |  |  | Telephone |  | (416) 777-8500
|     |  | Chartered Accountants     |  |  |  | Fax       |  | (416) 777-8818
|     |  | Bay Adelaide Centre       |  |  |  | Internet  |  | www.kpmg.ca   
|     |  | 333 Bay Street Suite 4600 |  |  |  |           |  |               
|     |  | Toronto ON M5H 2S5        |  |  |  |           |  |               



Independent Auditors Report of Registered Public
Accounting Firm.

To the Shareholders of North American Palladium Ltd.

We have audited the accompanying consolidated financial statements of North American Palladium Ltd., which comprise the consolidated balance sheets as at December 31, 2012 and December 31, 2011, the
consolidated statements of operations and comprehensive loss, shareholders equity and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information.

Managements Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International
Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors Responsibility

Our responsibility is to
express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards, and the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures
selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the
entitys preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances.An audit also includes evaluating the appropriateness of accounting
policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.

KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG

network of
independent member firms affiliated with KPMG International Cooperative

(KPMG International), a Swiss entity.

KPMG Canada provides services to KPMG LLP.



31

2012 Annual Report



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Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of North American Palladium Ltd.
as at December 31, 2012 and December 31, 2011, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by the
International Accounting Standards Board.





LOGO

Chartered Accountants, Licensed Public Accountants

February 21, 2013

Toronto, Canada



32

2012 Annual Report



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North American Palladium Ltd.



Consolidated Balance Sheets

(expressed in thousands of Canadian dollars)



|                                                               |  |       |    |  |                 |  |            |                  |  |  |            |  
|-------------------------------------------------------------- |  | ----- | -- |  | --------------- |  | ---------- | ---------------- |  |  | ---------- | -
|                                                               |  | Notes |    |  | December 312012 |  |            | December 31
2011 | 
|ASSETS                                                         |  |       |    |  |                 |  |            |                  |  |  |            |  
|Current Assets                                                 |  |       |    |  |                 |  |            |                  |  |  |            |  
|Cash and cash equivalents                                      |  |       |    |  |                 |  | $  20,168  |                  |  |  | $  50,935  |  
|Accounts receivable                                            |  |       | 5  |  |                 |  | 53,922     |                  |  |  | 73,048     |  
|Taxes receivable                                               |  |       |    |  |                 |  | -          |                  |  |  | 4,602      |  
|Inventories                                                    |  |       | 6  |  |                 |  | 15,388     |                  |  |  | 20,046     |  
|Other assets                                                   |  |       | 7  |  |                 |  | 8,448      |                  |  |  | 11,255     |  
|Assets of disposal group classified as held for sale           |  |       | 4  |  |                 |  | 29,814     |                  |  |  | -          |  
|Total Current Assets                                           |  |       |    |  |                 |  | 127,740    |                  |  |  | 159,886    |  
|Non-current Assets                                             |  |       |    |  |                 |  |            |                  |  |  |            |  
|Mining interests                                               |  |       | 8  |  |                 |  | 343,492    |                  |  |  | 256,159    |  
|Total Non-current Assets                                       |  |       |    |  |                 |  | 343,492    |                  |  |  | 256,159    |  
|Total Assets                                                   |  |       |    |  |                 |  | $  471,232 |                  |  |  | $  416,045 |  
|LIABILITIES AND SHAREHOLDERS EQUITY                           |  |       |    |  |                 |  |            |                  |  |  |            |  
|Current Liabilities                                            |  |       |    |  |                 |  |            |                  |  |  |            |  
|Accounts payable and accrued liabilities                       |  |       | 10 |  |                 |  | $  58,474  |                  |  |  | $  42,436  |  
|Credit facility                                                |  |       | 5  |  |                 |  | 15,089     |                  |  |  | -          |  
|Current portion of obligations under finance leases            |  |       | 11 |  |                 |  | 3,717      |                  |  |  | 2,428      |  
|Provisions                                                     |  |       | 12 |  |                 |  | 1,000      |                  |  |  | 1,000      |  
|Taxes payable                                                  |  |       |    |  |                 |  | 874        |                  |  |  | 715        |  
|Current derivative liability                                   |  |       | 13 |  |                 |  | 3,952      |                  |  |  | 4,875      |  
|Liabilities of disposal group classified as held for sale      |  |       | 4  |  |                 |  | 12,071     |                  |  |  | -          |  
|Total Current Liabilities                                      |  |       |    |  |                 |  | 95,177     |                  |  |  | 51,454     |  
|Non-current Liabilities                                        |  |       |    |  |                 |  |            |                  |  |  |            |  
|Income taxes payable                                           |  |       |    |  |                 |  | 2,352      |                  |  |  | 2,648      |  
|Asset retirement obligations                                   |  |       | 9  |  |                 |  | 15,214     |                  |  |  | 20,881     |  
|Obligations under finance leases                               |  |       | 11 |  |                 |  | 9,956      |                  |  |  | 2,104      |  
|Long-term debt                                                 |  |       | 13 |  |                 |  | 101,633    |                  |  |  | 65,698     |  
|Deferred mining tax liability                                  |  |       | 22 |  |                 |  | -          |                  |  |  | 4,264      |  
|Total Non-current Liabilities                                  |  |       |    |  |                 |  | 129,155    |                  |  |  | 95,595     |  
|Shareholders Equity                                           |  |       |    |  |                 |  |            |                  |  |  |            |  
|Common share capital and purchase warrants                     |  |       | 15 |  |                 |  | 776,632    |                  |  |  | 740,888    |  
|Stock options and related surplus                              |  |       |    |  |                 |  | 9,125      |                  |  |  | 7,859      |  
|Equity component of convertible debentures, net of issue costs |  |       | 13 |  |                 |  | 6,931      |                  |  |  | -          |  
|Contributed surplus                                            |  |       |    |  |                 |  | 8,873      |                  |  |  | 8,873      |  
|Deficit                                                        |  |       |    |  |                 |  | (554,661   | )                |  |  | (488,624   | )
|Total Shareholders Equity                                     |  |       |    |  |                 |  | 246,900    |                  |  |  | 268,996    |  
|Total Liabilities and Shareholders Equity                     |  |       |    |  |                 |  | $  471,232 |                  |  |  | $  416,045 |  

Commitments and contingencies  Notes 18 and 21

See accompanying notes to the consolidated financial statements

On Behalf of the Board of Directors



|                            |  |                            |  | 
|--------------------------- |  | -------------------------- |  | 
|LOGO                        |  | LOGO                       |  | 
|André J. Douchane, Director |  | Steven R. Berlin, Director |  | 



33

2012 Annual Report



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North American Palladium Ltd.



Consolidated Statements of Operations and

Comprehensive Loss

(expressed in
thousands of Canadian dollars, except share and per share amounts)



|                                                                                        |  |       |      |   |      |  |             |      |  |  |             |  
|--------------------------------------------------------------------------------------- |  | ----- | ---- | - | ---- |  | ----------- | ---- |  |  | ----------- | -
|                                                                                        |  | Notes |      |   | 2012 |  |             | 2011 | 
|Revenue                                                                                 |  |       | 19   |   |      |  | $  160,704  |      |  |  | $  143,659  |  
|                                                                                        |  |       |      |   |      |  |             |      |  |  |             |  
|Mining operating expenses                                                               |  |       |      |   |      |  |             |      |  |  |             |  
|Production costs                                                                        |  |       |      |   |      |  | 100,802     |      |  |  | 89,657      |  
|Smelting, refining and freight costs                                                    |  |       |      |   |      |  | 13,679      |      |  |  | 9,206       |  
|Royalty expense                                                                         |  |       |      |   |      |  | 6,720       |      |  |  | 5,819       |  
|Depreciation and amortization                                                           |  |       |      |   |      |  | 19,706      |      |  |  | 10,144      |  
|Loss (gain) on disposal of equipment                                                    |  |       |      |   |      |  | 293         |      |  |  | (923        | )
|Other                                                                                   |  |       |      |   |      |  | 3,813       |      |  |  | 1,352       |  
|Total mining operating expenses                                                         |  |       |      |   |      |  | 145,013     |      |  |  | 115,255     |  
|Income from mining operations                                                           |  |       |      |   |      |  | 15,691      |      |  |  | 28,404      |  
|                                                                                        |  |       |      |   |      |  |             |      |  |  |             |  
|Other expenses                                                                          |  |       |      |   |      |  |             |      |  |  |             |  
|Exploration                                                                             |  |       |      |   |      |  | 14,513      |      |  |  | 9,939       |  
|General and administration                                                              |  |       |      |   |      |  | 12,002      |      |  |  | 12,201      |  
|Other income                                                                            |  |       | 20   |   |      |  | (3,598      | )    |  |  | (2,783      | )
|Interest expense and other costs                                                        |  |       | 20   |   |      |  | 4,681       |      |  |  | 2,463       |  
|Foreign exchange (gain) loss                                                            |  |       |      |   |      |  | (504        | )    |  |  | 359         |  
|Total other expenses                                                                    |  |       |      |   |      |  | 27,094      |      |  |  | 22,179      |  
|(Loss) income from continuing operations before taxes                                   |  |       |      |   |      |  | (11,403     | )    |  |  | 6,225       |  
|Income and mining tax expense                                                           |  |       | 22   |   |      |  | -           |      |  |  | (1,833      | )
|(Loss) income and comprehensive (loss) income from continuing operations for the period |  |       |      |   |      |  | $  (11,403  | )    |  |  | $  4,392    |  
|Loss and comprehensive loss from discontinued
operations for the period                 |  |       | 4    |   |      |  | (54,634     | )    |  |  | (69,546     | )
|Loss and comprehensive loss for the period                                              |  |       |      |   |      |  | $  (66,037  | )    |  |  | $  (65,154  | )
|Loss per share                                                                          |  |       |      |   |      |  |             |      |  |  |             |  
|Basic                                                                                   |  |       |      |   |      |  | $  (0.39    | )    |  |  | $  (0.40    | )
|Diluted                                                                                 |  |       | 15(f | ) |      |  | $  (0.39    | )    |  |  | $  (0.40    | )
|(Loss) income from continuing operations per share                                      |  |       |      |   |      |  |             |      |  |  |             |  
|Basic                                                                                   |  |       |      |   |      |  | $  (0.07    | )    |  |  | $  0.03     |  
|Diluted                                                                                 |  |       |      |   |      |  | $  (0.07    | )    |  |  | $  0.03     |  
|Loss from discontinued operations per share                                             |  |       |      |   |      |  |             |      |  |  |             |  
|Basic                                                                                   |  |       |      |   |      |  | $  (0.32    | )    |  |  | $  (0.43    | )
|Diluted                                                                                 |  |       |      |   |      |  | $  (0.32    | )    |  |  | $  (0.43    | )
|Weighted average number of shares outstanding                                           |  |       |      |   |      |  |             |      |  |  |             |  
|Basic                                                                                   |  |       | 15(f | ) |      |  | 170,960,774 |      |  |  | 162,011,253 |  
|Diluted                                                                                 |  |       | 15(f | ) |      |  | 170,983,774 |      |  |  | 162,011,253 |  

See accompanying notes to the consolidated financial statements



34

2012 Annual Report



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North American Palladium Ltd.



Consolidated Statements of Cash Flows

(expressed in thousands of Canadian dollars)



|                                                           |  |       |      |   |      |  |            |      |  |  |           |  
|---------------------------------------------------------- |  | ----- | ---- | - | ---- |  | ---------- | ---- |  |  | --------- | -
|                                                           |  | Notes |      |   | 2012 |  |            | 2011 | 
|Cash provided by (used in)                                 |  |       |      |   |      |  |            |      | 
|Operations                                                 |  |       |      |   |      |  |            |      | 
|Net income (loss) from continuing operations for the year  |  |       |      |   |      |  | $  (11,403 | )    |  |  | $  4,392  |  
|Operating items not involving cash                         |  |       |      |   |      |  |            |      |  |  |           |  
|Depreciation and amortization                              |  |       |      |   |      |  | 19,706     |      |  |  | 10,144    |  
|Accretion expense                                          |  |       | 20   |   |      |  | 3,258      |      |  |  | 749       |  
|Deferred income and mining tax recovery                    |  |       | 22   |   |      |  | -          |      |  |  | (555      | )
|Share-based compensation and employee benefits             |  |       | 15(h | ) |      |  | 2,277      |      |  |  | 3,086     |  
|Other                                                      |  |       |      |   |      |  | 1,756      |      |  |  | (2,218    | )
|                                                           |  |       |      |   |      |  | 15,594     |      |  |  | 15,598    |  
|Changes in non-cash working capital                        |  |       | 23   |   |      |  | 39,655     |      |  |  | 16,024    |  
|                                                           |  |       |      |   |      |  | 55,249     |      |  |  | 31,622    |  
|Financing Activities                                       |  |       |      |   |      |  |            |      |  |  |           |  
|Issuance of common shares and warrants, net of issue costs |  |       | 15(d | ) |      |  | 36,404     |      |  |  | 61,916    |  
|Issuance of long-term debt, net of issue costs             |  |       | 13   |   |      |  | -          |      |  |  | 69,656    |  
|Issuance of convertible debentures, net of issue costs     |  |       | 13   |   |      |  | 40,804     |      |  |  | -         |  
|Credit facility                                            |  |       | 5    |   |      |  | 15,287     |      |  |  | -         |  
|Finance lease facility                                     |  |       | 11   |   |      |  | 11,239     |      |  |  | -         |  
|Repayment of obligations under finance leases              |  |       | 11   |   |      |  | (4,749     | )    |  |  | (1,523    | )
|Interest paid                                              |  |       |      |   |      |  | (8,493     | )    |  |  | (157      | )
|Mine reclamation deposit                                   |  |       |      |   |      |  | -          |      |  |  | 8,768     |  
|                                                           |  |       |      |   |      |  | 90,492     |      |  |  | 138,660   |  
|Investing Activities                                       |  |       |      |   |      |  |            |      |  |  |           |  
|Additions to mining interests (net)                        |  |       | 8    |   |      |  | (145,180   | )    |  |  | (148,309  | )
|Proceeds on disposal of mining interests (net)             |  |       |      |   |      |  | 526        |      |  |  | 1,884     |  
|                                                           |  |       |      |   |      |  | (144,654   | )    |  |  | (146,425  | )
|Increase in cash from continuing operations                |  |       |      |   |      |  | 1,087      |      |  |  | 23,857    |  
|Net cash used in discontinued operations                   |  |       | 4    |   |      |  | (31,301    | )    |  |  | (48,081   | )
|Reclassification of cash to assets held for sale           |  |       |      |   |      |  | (553       | )    |  |  | (71       | )
|Decrease in cash                                           |  |       |      |   |      |  | (30,767    | )    |  |  | (24,295   | )
|Cash and cash equivalents, beginning of year               |  |       |      |   |      |  | 50,935     |      |  |  | 75,159    |  
|Cash and cash equivalents, end of year                     |  |       |      |   |      |  | $  20,168  |      |  |  | $  50,864 |  
|Cash and cash equivalents consisting of:                   |  |       |      |   |      |  |            |      |  |  |           |  
|Cash                                                       |  |       |      |   |      |  | $  20,168  |      |  |  | $  50,532 |  
|Short-term investments                                     |  |       |      |   |      |  | -          |      |  |  | 332       |  
|                                                           |  |       |      |   |      |  | $  20,168  |      |  |  | $  50,864 |  
|Foreign exchange included in cash balance                  |  |       |      |   |      |  | $  (2      | )    |  |  | $  66     |  

See accompanying notes to the consolidated financial statements



35

2012 Annual Report



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North American Palladium Ltd.



Consolidated Statements of Shareholders Equity

(expressed in thousands of Canadian dollars, except share amounts)



|                                                                     |  |       |      |   |                  |  |             |              |  |  |              |   |  |          |          |   |                                        |  |          |                    |  |  |          |  |  |                          |          |  |  |  |             |   |  |  |            |  
|-------------------------------------------------------------------- |  | ----- | ---- | - | ---------------- |  | ----------- | ------------ |  |  | ------------ | - |  | -------- | -------- | - | -------------------------------------- |  | -------- | ------------------ |  |  | -------- |  |  | ------------------------ | -------- |  |  |  | ----------- | - |  |  | ---------- | -
|                                                                     |  | Notes |      |   | Number
of shares |  |             | Capitalstock |  |  | Stockoptions |   |  | Warrants |          |   | Equitycomponentofconvertibledebentures |  |          | Contributedsurplus |  |  | Deficit  |  |  | Totalshareholdersequity |         
|Balance, January 1, 2011                                             |  |       | 15   |   |                  |  | 154,653,275 |              |  |  | $  697,674   |   |  |          | $  5,596 |   |                                        |  | $  5,113 |                    |  |  | -        |  |  |                          | $  5,537 |  |  |  | $  (423,470 | ) |  |  | $  290,450 |  
|                                                                     |  |       |      |   |                  |  |             |              | 
|Common shares issued:                                                |  |       |      |   |                  |  |             |              |  |  |              |   |  |          |          |   |                                        |  |          |                    |  |  |          |  |  |                          |          |  |  |  |             |   |  |  |            |  
|Private placement of flow-through shares, net of issue costs         |  |       | 15(d | ) |                  |  | 2,667,000   |              |  |  | 20,594       |   |  |          | -        |   |                                        |  | -        |                    |  |  | -        |  |  |                          | -        |  |  |  | -           |   |  |  | 20,594     |  
|Premium on issuance of flow-through shares                           |  |       |      |   |                  |  | -           |              |  |  | (1,840       | ) |  |          | -        |   |                                        |  | -        |                    |  |  | -        |  |  |                          | -        |  |  |  | -           |   |  |  | (1,840     | )
|                                                                     |  |       |      |   |                  |  |             |              | 
|Warrants:                                                            |  |       |      |   |                  |  |             |              |  |  |              |   |  |          |          |   |                                        |  |          |                    |  |  |          |  |  |                          |          |  |  |  |             |   |  |  |            |  
|Warrants exercised                                                   |  |       | 15(b | ) |                  |  | 5,009,986   |              |  |  | 22,514       |   |  |          | -        |   |                                        |  | (1,239   | )                  |  |  | -        |  |  |                          | 14       |  |  |  | -           |   |  |  | 21,289     |  
|Expiration of warrants, net of tax                                   |  |       | 15(b | ) |                  |  | -           |              |  |  | -            |   |  |          | -        |   |                                        |  | (3,874   | )                  |  |  | -        |  |  |                          | 3,322    |  |  |  | -           |   |  |  | (552       | )
|                                                                     |  |       |      |   |                  |  |             |              | 
|Stock based compensation:                                            |  |       |      |   |                  |  |             |              |  |  |              |   |  |          |          |   |                                        |  |          |                    |  |  |          |  |  |                          |          |  |  |  |             |   |  |  |            |  
|Stock options exercised                                              |  |       | 15(e | ) |                  |  | 317,919     |              |  |  | 1,105        |   |  |          | (300     | ) |                                        |  | -        |                    |  |  | -        |  |  |                          | -        |  |  |  | -           |   |  |  | 805        |  
|Stock-based compensation expense                                     |  |       | 15(c | ) |                  |  | 203,252     |              |  |  | 841          |   |  |          | 2,563    |   |                                        |  | -        |                    |  |  | -        |  |  |                          | -        |  |  |  | -           |   |  |  | 3,404      |  
|Net loss and comprehensive loss for the year ended December 31, 2011 |  |       |      |   |                  |  | -           |              |  |  | -            |   |  |          | -        |   |                                        |  | -        |                    |  |  | -        |  |  |                          | -        |  |  |  | (65,154     | ) |  |  | (65,154    | )
|Balance, December 31, 2011                                           |  |       |      |   |                  |  | 162,851,432 |              |  |  | $  740,888   |   |  |          | $  7,859 |   |                                        |  | $  -     |                    |  |  | $  -     |  |  |                          | $  8,873 |  |  |  | $  (488,624 | ) |  |  | $  268,996 |  
|                                                                     |  |       |      |   |                  |  |             |              | 
|Common shares issued:                                                |  |       |      |   |                  |  |             |              |  |  |              |   |  |          |          |   |                                        |  |          |                    |  |  |          |  |  |                          |          |  |  |  |             |   |  |  |            |  
|Private placement of flow-through shares, net of issue costs         |  |       | 15(d | ) |                  |  | 13,725,000  |              |  |  | 36,405       |   |  |          | -        |   |                                        |  | -        |                    |  |  | -        |  |  |                          | -        |  |  |  | -           |   |  |  | 36,405     |  
|Premium on issuance of flow-through shares                           |  |       |      |   |                  |  | -           |              |  |  | (1,901       | ) |  |          | -        |   |                                        |  | -        |                    |  |  | -        |  |  |                          | -        |  |  |  | -           |   |  |  | (1,901     | )
|                                                                     |  |       |      |   |                  |  |             |              | 
|Convertible debentures:                                              |  |       |      |   |                  |  |             |              |  |  |              |   |  |          |          |   |                                        |  |          |                    |  |  |          |  |  |                          |          |  |  |  |             |   |  |  |            |  
|Equity component of convertible debentures, net of issue costs       |  |       | 13   |   |                  |  | -           |              |  |  | -            |   |  |          | -        |   |                                        |  | -        |                    |  |  | 6,931    |  |  |                          | -        |  |  |  | -           |   |  |  | 6,931      |  
|                                                                     |  |       |      |   |                  |  |             |              | 
|Stock based compensation:                                            |  |       |      |   |                  |  |             |              |  |  |              |   |  |          |          |   |                                        |  |          |                    |  |  |          |  |  |                          |          |  |  |  |             |   |  |  |            |  
|Stock-based compensation expense                                     |  |       | 15(c | ) |                  |  | 551,401     |              |  |  | 1,240        |   |  |          | 1,266    |   |                                        |  | -        |                    |  |  | -        |  |  |                          | -        |  |  |  | -           |   |  |  | 2,506      |  
|Net loss and comprehensive loss for the year ended December 31, 2012 |  |       |      |   |                  |  | -           |              |  |  | -            |   |  |          | -        |   |                                        |  | -        |                    |  |  | -        |  |  |                          | -        |  |  |  | (66,037     | ) |  |  | (66,037    | )
|Balance, December 31, 2012                                           |  |       |      |   |                  |  | 177,127,833 |              |  |  | $  776,632   |   |  |          | $  9,125 |   |                                        |  | $  -     |                    |  |  | $  6,931 |  |  |                          | $  8,873 |  |  |  | $  (554,661 | ) |  |  | $  246,900 |  

See accompanying notes to the consolidated financial statements



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Notes to the Consolidated Financial Statements

(expressed in thousands of Canadian dollars, except per share amounts and metal prices)

1.    NATURE OF OPERATIONS



North American Palladium Ltd. (NAP) is
domiciled in Canada and was incorporated on September 12, 1991 under the Canadian Business Corporations Act. The Companys 100%-owned subsidiaries are Lac des Iles Mines Ltd. (LDI) and NAP Quebec Mines Ltd. (NAP
Quebec).

NAPs flagship operation is the LDI palladium mine, located northwest of Thunder Bay, Ontario, which started producing palladium in
1993. The Company is currently expanding the LDI mine to transition from mining via ramp access to mining via shaft while utilizing bulk mining methods.

The Company is incurring additional exploration expenditures on other palladium opportunities at LDI, including the Sheriff deposit.

The Company also owns the Vezza gold mine and Sleeping Giant mill located north of Val Dor, Quebec. The Companys other Québec-based properties
consist of Discovery, Flordin, Cameron Shear, Florence, Laflamme, Dormex and Harricana.

The consolidated financial statements for the Company as at
December 31, 2012 and for the year ended December 31, 2012, include the Company and its subsidiaries (collectively referred to as the Company).

At December 31, 2012, the Company was committed to a plan to market and sell its gold division assets (Disposal Group) through the sale of the shares of its wholly-owned subsidiary NAP Quebec.

2.    BASIS OF PRESENTATION



Statement of Compliance

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the
International Accounting Standards Board (IASB), applicable to the preparation of these financial statements, including IAS 1, Presentation of Financial Statements.

These consolidated financial statements were authorized for issuance by the Board of Directors of the Company on February 21, 2013.

Basis of Measurement

These consolidated financial statements have been prepared on the historical cost basis,
except for the following items in the consolidated balance sheet:



| | (i) | Accounts receivable and related derivative instruments are measured at fair value.
| | --- | ----------------------------------------------------------------------------------



| | (ii) | Financial instruments at fair value through profit or loss are measured at fair value.
| | ---- | --------------------------------------------------------------------------------------



| | (iii) | Liabilities for cash-settled share-based payment arrangements are measured at fair value.
| | ----- | -----------------------------------------------------------------------------------------

Functional and Presentation Currency

These consolidated financial statements are presented in Canadian
dollars, which is the Companys and each of its subsidiaries functional currency. All financial information is expressed in thousands of Canadian dollars, except share and per share amounts.



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Use of Judgments and Estimates

The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgments, estimates, and assumptions that affect the
application of accounting policies and the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated 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.

(a)   Critical judgments

Information about critical judgments in applying accounting policies that have the most significant effect on the amounts recognized in the consolidated financial statements is included in the following note:

Note 9  Asset retirement obligations and reclamation deposits

(b)   Key estimates and assumptions

Certain assumptions are dependent upon reserves, which represent the estimated amount of ore that can be economically and legally extracted from the Companys properties. In order to estimate reserves,
assumptions are required about a range of geological, technical and economic factors, including quantities, grades, production techniques, recovery rates, production costs, transportation costs, commodity prices and exchange rates. Estimating the
quantity and/or grade of reserves requires the size, shape and depth of ore bodies to be determined by analyzing geological data such as drilling samples. This process may require complex and difficult geological judgments to interpret
the data. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period they are determined and in any future periods affected.

Because the economic assumptions used to estimate reserves change from period to period and additional geological data is generated during the
course of operations, estimates of reserves may change from period to period. Changes in reported reserves may affect the Companys financial results and financial position in a number of ways, including the following:



| | (i) | Asset carrying values including mining interests may be affected due to changes in estimated future cash flows;
| | --- | ---------------------------------------------------------------------------------------------------------------



| | (ii) | Depreciation and amortization charged in the statement of operations may change or be impacted where such charges are determined by the units of production basis, or where the
useful economic lives of assets change;
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iii) | Decommissioning, site restoration and environmental provisions may change where changes in estimated reserves affect expectations about the timing or cost of these activities;
and
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iv) | The carrying value of deferred tax assets may change due to changes in estimates of the likely recovery of the tax benefits.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------

Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within the next
financial year are included in the following notes:

Note 19  Revenue from metal sales

Note 21  Contingencies

Note
22  Income taxes



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3.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



The accounting policies set out below have
been applied consistently by all Companys entities for all periods presented in these consolidated financial statements, unless otherwise indicated.

Basis of Consolidation

These consolidated financial statements include the accounts of NAP and its
wholly-owned subsidiaries.

(a)   Business combinations

The Company measures goodwill as the fair value of the consideration transferred including the recognized amount of any non-controlling interest in
the acquiree, less the fair value of the identifiable assets acquired and liabilities assumed, all measured as of the acquisition date. When the excess is negative, a bargain purchase gain is recognized immediately in profit or loss.

The Company elects on a transaction-by-transaction basis whether to measure non-controlling interest at its fair value, or at its proportionate
share of the recognized amount of the identifiable net assets, at the acquisition date.

Transaction costs, other than those directly
associated with the issue of debt or equity securities, that the Company incurs in connection with a business combination are expensed as incurred.

(b)   Subsidiaries

Subsidiaries are entities controlled by NAP. The financial
statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.

(c)  Transactions eliminated on consolidation

Inter-company balances and
transactions and any unrealized income and expenses arising from inter-company transactions are eliminated in preparing the consolidated financial statements.

Foreign Currency Translations

The reporting and functional currency of the Company and its subsidiaries is the
Canadian dollar. Accordingly, the Company translates monetary assets and liabilities denominated in foreign currency at the rate of exchange prevailing at the consolidated balance sheet dates, non-monetary assets and liabilities denominated in
foreign currency at the rate in effect at the date the transaction occurred and revenues and expenses denominated in foreign currency at the exchange rate in effect during the applicable accounting period. All resulting foreign exchange gains and
losses are recorded in the Consolidated Statements of Operations and Comprehensive Loss.

Financial Instruments

(a)  Non-derivative financial assets

The Company initially recognizes loans and receivables and deposits on the date they originated. All other financial assets (including assets designated at fair value through profit or loss) are recognized
initially on the trade date at which the Company becomes a party to the contractual provisions of the instrument.



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Financial instruments are measured on initial recognition at fair value
plus, in the case of instruments other than those classified as fair value through profit and loss, directly attributable transaction costs.

The Company has the following non-derivative financial assets: financial assets at fair value through profit or loss and loans and receivables.

A financial asset is classified at fair value through profit or loss if it is classified as held for trading or is designated as such upon initial
recognition. These financial instruments are measured at fair value, and changes therein are recognized in the Consolidated Statements of Operations and Comprehensive Loss. The Companys accounts receivable from the sale of palladium and
by-product metals from the LDI mine primarily represent the material financial instruments which have been recorded at fair value through profit or loss (see note 5).

Financial assets classified as loans and receivables are measured subsequent to initial recognition at amortized cost using the effective interest method, less any impairment losses. The Companys loan and
receivables are included in other assets (refer to note 7). Cash and cash equivalents are stated at fair value and include cash on account less outstanding cheques, demand deposits and short-term guaranteed investments with original maturities of
three months or less.



|(b) | Non-derivative financial liabilities
|--- | ------------------------------------

The Company initially recognizes debt securities issued and subordinated liabilities on the date they originated. All other financial liabilities
(including liabilities designated at fair value through profit or loss) are recognized initially on the trade date at which the Company becomes a party to the contractual provisions of the instrument.

The Company derecognizes a financial liability when its contractual obligations are discharged, cancelled or expired. Financial assets and
liabilities are offset and the net amount presented in the consolidated balance sheet when, and only when, the Company has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the
liability simultaneously.

The Company has the following non-derivative financial liabilities: long-term debt, finance leases, loans and
borrowings, bank overdrafts, credit facilities, and trade and other payables.

Such financial liabilities are designated initially at
fair value through profit or loss, and recognized at fair value plus any directly attributable transaction costs. Subsequent to initial recognition these financial liabilities are designated at amortized cost and are measured at amortized cost using
the effective interest method.



|(c) | Derivative financial instruments
|--- | --------------------------------

The
Company holds derivative financial instruments to minimize its foreign currency and market price exposures. Embedded derivatives are separated from the host contract and accounted for separately if the economic characteristics and risks of the host
contract and the embedded derivative are not closely related, a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative, and the combined instrument is not measured at fair value through profit or
loss.

Derivatives are recognized initially at fair value and any associated transaction costs are recognized in profit or loss as
incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are accounted for as described below.

Separable embedded derivatives

Changes in the fair value of separable embedded
derivatives are recognized immediately in profit or loss.



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Other non-trading derivatives

When a derivative financial instrument is not held for trading and is not designated in a qualifying hedge relationship, all changes in its fair
value are recognized immediately in profit or loss.

Inventories

Concentrate, crushed and broken ore stockpiles, and gold inventory are valued at the lower of average production cost (including an allocation of the depreciation 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. The amount of stockpiled ore that is not expected to be processed within one year, if any, is shown as a
long-term asset. Gold inventory is comprised of unprocessed ore either in stockpiles or bins, unrecovered gold in either carbon or solution within the milling circuit, and gold-silver doré bars produced but not sold as at the reporting date.
Supplies inventory is valued at the lower of average cost and net realizable value.

Mining Interests



|(a) | Recognition and measurement
|--- | ---------------------------

Property,
plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses.

Cost includes expenditures
that are directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the assets to a working condition for their
intended use, the costs of dismantling and removing the items and restoring the site on which they are located, and borrowing costs on qualifying assets for which the commencement date for capitalization is on or after January 1, 2010. Where
funds used to finance a major project form part of general borrowings, the Company capitalizes interest on those borrowings proportionate to the project funds used.

When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items or major components of property, plant and equipment.

Spare parts and servicing equipment are usually carried as inventory and recognized in profit or loss as consumed. However, major spare parts and
stand-by equipment qualify as property, plant and equipment when the Company expects to use them during more than one period. Similarly, if the spare parts and servicing equipment can be used only in connection with an item of property, plant and
equipment, they are accounted for as property, plant and equipment.

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 reserve potential and subsequent exploration, expenditures are capitalized. Determination as to reserve potential is based
on the results of 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. No amortization
is provided in respect of mine development expenditures until commencement of commercial production. Any production revenue earned prior to commercial production, net of related costs, is offset against the development costs.

Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying
amount of property, plant and equipment, and are recognized within mining operating expenses.



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|(b) | Subsequent costs
|--- | ----------------

The cost of
replacing a part of an item of property, plant and equipment is recognized at the carrying amount of the item if it is probable that the future economic benefits embodied within the item will flow to the Company and its cost can be measured
reliably. The carrying amount of the replaced part is derecognized. The costs of the day-to-day servicing of property, plant and equipment are recognized in profit or loss as incurred.



|(c) | Depreciation and amortization
|--- | -----------------------------

Mining
interests relating to plant and equipment, mining leases and claims, royalty interests, and other development costs are recorded at cost with depreciation and amortization provided on the unit-of-production method over the estimated remaining ounces
of palladium (LDI) and gold (NAP Quebec) to be produced based on the proven and probable reserves or, in the event that the company is mining resources, an appropriate estimate of the resources mined or expected to be mined.

Mining interests relating to small vehicles and certain machinery with a determinable expected life are recorded at cost with depreciation provided
on a straight-line basis over their estimated useful lives, ranging from three to seven years, which most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. Straight-line depreciation is
calculated over the depreciable amount, which is the cost of an asset, less its residual value.

Significant components of individual
assets are assessed and, if a component has a useful life that is different from the remainder of that asset, that component is depreciated separately using the unit-of-production or straight-line method as appropriate. Costs relating to land are
not amortized.

Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain
that the Company will obtain ownership by the end of the lease term.

Depreciation methods, useful lives and residual values are reviewed
at each financial year-end and adjusted if appropriate.

Discontinued operations and assets held for sale

A non-current asset (or disposal group) is reclassified as held for sale and reclassified to current assets if the Company expects that its carrying value will be
recovered principally through a sale transaction and not through its continued use provided that the asset (or disposal group) is available for immediate sale in its present condition and realization of its sale is highly probable. A high
probability of sale is considered to exist when the Company is committed to a plan to sell the asset (or disposal group), has undertaken an active program to actively market the asset (or disposal group) and locate a buyer at a price reasonable in
relation to fair value of the asset (or disposal group), and expects the sale process to be concluded within one year following the date of reclassification. The assets and liabilities of any subsidiary for which the Company is committed to sell and
for which loss of control of the subsidiary is expected to occur are also reclassified as held for sale.

Any component of the Company which, while in
use, represented one or more cash-generating units (CGUs) of the Company, has been disposed of or classified as held for sale, and represents a major line of business or geographical area of operations or is part of a single plan to
dispose of such a business or operation or is otherwise a subsidiary acquired exclusively for resale is classified as a discontinued operation. The assets, liabilities, comprehensive income, and cash flows relating to a discontinued operation of the
Company are segregated and reported separately from the continuing operations of the Company in the period of reclassification without restatement or re-presentation of comparative periods prior to the reporting period in which the reclassification
occurs.



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Impairment

The carrying amounts of the Companys non-financial assets, excluding inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment.
Impairment is assessed at the level of CGUs. An impairment loss is recognized in the Consolidated Statements of Operations and Comprehensive Loss for any excess of carrying amount over the recoverable amount.

Impairment is determined for an individual asset unless the asset does not generate cash inflows that are independent of those generated from other assets or groups
of assets, in which case, the individual assets are grouped together into CGUs for impairment purposes.

The recoverable amount of an asset or CGU is the
greater of its value in use, defined as the discounted present value of the future cash flows expected to arise from its continuing use and its ultimate disposal, and its fair value less costs to sell, defined as the best
estimate of the assets selling price less costs of disposal. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time
value of money and the risks specific to the asset.

An impairment loss is recognized in the Consolidated Statements of Operations and Comprehensive Loss
if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount.

Impairment losses recognized in prior periods are assessed at
each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss on non-financial assets other than goodwill is reversed if there has been a change in the estimates used to determine the recoverable amount,
only to the extent that the assets carrying amount does not exceed the carrying amount that would have been determined, net of amortization, if no impairment loss had been recognized.

Mining Interests - Open Pit Mining Costs

In open pit mining operations, it is necessary to remove overburden
and other waste materials to access ore from which minerals can be extracted economically. The process of mining overburden and waste materials is referred to as stripping. Stripping costs generate a future economic benefit by providing
(i) access to ore to be mined in the future; (ii) increases the fair value of the mine (or pit) as access to future mineral reserves becomes less costly; and (iii) increases the productive capacity or extends the productive life of
the mine (or pit). For production phase stripping costs that are expected to generate a future economic benefit, the current period stripping costs are capitalized as open pit mine development costs.

Stripping costs incurred during the production stage of a pit are accounted for as costs of the inventory produced during the period that the stripping costs were
incurred, unless these costs are expected to provide a future economic benefit.

Capitalized open pit mine development costs are depreciated once the
open pit has entered production and the future economic benefit is being derived. Capitalized open pit mine development costs are depreciated using the unit of production method over the life of the ore body to which accessibility has been improved
by the stripping activity.

Employee benefits

Defined contribution plans

A defined contribution plan is a post-employment benefit plan under
which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension plans are recognized as an employee benefit
expense in profit or loss in the periods during which services are rendered by employees. Prepaid contributions are recognized as an asset to the extent that a cash refund or a reduction in future payments is available. Contributions to a defined
contribution plan that are due more than 12 months after the end of the period in which the employees render the service are discounted to their present value.



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Compensation Agreements

Share-based payment transactions

The grant date fair value of equity-classified share-based payment awards granted to employees is recognized as an employee expense, with a corresponding increase in equity, over the period that the employees
unconditionally become entitled to the awards. The amount recognized as an expense is adjusted to reflect the number of awards for which the related service are expected to be met, such that the amount ultimately recognized as an expense is based on
the number of awards that do meet the related service and non-market performance conditions at the vesting date.

The Company has a
Restricted Share Unit (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 is equivalent in value to the fair market
value of a common share of the Company on the date of the award and a corresponding liability is established on the balance sheet. The value of each award is charged to compensation expense over the period of vesting. At each reporting date, the
compensation expense and liability are adjusted to reflect the changes in market value of the liability based on the fair values of RSUs for each vesting period determined using the Black-Scholes model.

Share-based payment arrangements in which the Company receives goods or services as consideration for its own equity instruments are accounted for
as equity-settled share-based payment transactions, regardless of how the equity instruments are obtained by the Company.

Provisions

A provision is recognized if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is
probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money
and the risks specific to the liability.



|(a) | Production Obligations
|--- | ----------------------

A provision
for an obligation based on achieving specific production targets is recognized when the Company, based on estimates of recoverable minerals and planned production in the current mine plan for each property, determines the production target
expected to be achieved.



|(b) | Asset Retirement Obligations
|--- | ----------------------------

In
accordance with Company policies, asset retirement obligations relating to legal and constructive obligations for future site reclamation and closure of the Companys mine sites are recognized when incurred and a liability and corresponding
asset are recorded at managements best estimate. Estimated closure and restoration costs are provided for in the accounting period when the obligation arising from the related disturbance occurs.

The amount of any liability recognized is estimated based on the risk-adjusted costs required to settle present obligations, discounted using a
pre-tax risk-free discount rate consistent with the time period of expected cash flows. When the liability is initially recorded, a corresponding asset retirement cost is recognized as an addition to mining interests and amortized using the unit of
production method.

The liability for each mine site is accreted over time and the accretion charges are recognized as a finance cost in
the Consolidated Statements of Operations and Comprehensive Loss. The liability is subject to re-measurement at each reporting date based on changes in discount rates and timing or amounts of the costs to be incurred. Changes in the liability, other
than accretion charges, relating to mine rehabilitation and restoration obligations, which are not the result of current production of inventory, are added to or deducted from the carrying value of the related asset retirement cost in the reporting
period recognized. If the change results in a reduction of the obligation in excess of the carrying value of the related asset retirement cost, the excess balance is recognized as a recovery through profit or loss in the period.



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Revenue and Accounts Receivable

Revenue from the sale of metals in the course of ordinary activities is measured at the fair value of the consideration received or receivable, net of volume
adjustments. Revenue is recognized when persuasive evidence exists, usually in the form of an executed sales agreement, that the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is
probable, the associated costs and possible return of goods can be estimated reliably, there is no continuing management involvement with the goods, and the amount of revenue can be measured reliably. The timing of the transfers of risks and rewards
varies depending on the individual terms of the contract of sale.

Revenue from the sale of palladium and by-product metals from the LDI mine is
provisionally recognized based on quoted market prices upon the delivery of concentrate to the smelter or designated shipping point, which is when title transfers and significant rights and obligations of ownership pass. The Companys smelter
contracts provide for final prices to be determined by quoted market prices in a period subsequent to the date of concentrate delivery. Variations from the provisionally priced sales are recognized as revenue adjustments until final pricing is
determined. Accounts receivable is recorded net of estimated treatment and refining costs which are subject to final assay adjustments. Subsequent adjustments to provisional pricing amounts due to changes in metal prices and foreign exchange are
included in revenues on the Consolidated Statements of Operations and Comprehensive Loss and disclosed in the notes to the consolidated financial statements.

Prior to its closure, revenue from the sale of gold-silver doré bars from Sleeping Giant was recognized when the significant risks and rewards of ownership have transferred to the buyer and selling prices
are known or can be reasonably estimated.

Interest expense and other costs and other income

Other income is comprised of interest income on funds invested (including available-for-sale financial assets), gains on the disposal of available-for-sale
financial assets, gains on the renouncement of flow-through expenditures, changes in the fair value of financial assets at fair value through profit or loss, and gains on hedging instruments that are recognized in profit or loss. Interest income is
recognized as it accrues in profit or loss, using the effective interest method.

Interest expense and other costs are comprised of interest expense on
borrowings, accretion expense, unwinding of the discount on provisions, changes in the fair value of financial assets at fair value through profit or loss, impairment losses recognized on financial assets, losses on hedging instruments that are
recognized in profit or loss, and changes in the fair value of the palladium warrants. Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognized in profit or loss using the
effective interest method.

Foreign currency gains and losses are reported on a net basis.

Income and mining taxes

Income tax expense is comprised of current and deferred tax. Current tax and deferred
tax are recognized in profit or loss except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income.

Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect
of previous years.



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Deferred tax is recognized in respect of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for the following temporary differences:



| | (i) | the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss;
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | temporary differences relating to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable
future; and
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iii) | temporary differences arising on the initial recognition of goodwill.
| | ----- | ---------------------------------------------------------------------

Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or
substantively enacted by the reporting date.

Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current
tax liabilities and assets, and they relate to income or mining taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax
assets and liabilities will be realized simultaneously.

A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary
differences, to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that
the related tax benefit will be realized.

Basic and Diluted Earnings (Loss) Per Share

Basic earnings (loss) per common share (EPS) is computed by dividing the income (loss) for the period by the weighted average number of common shares outstanding during the reporting period.

Diluted EPS 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 debentures, palladium warrants and common share purchase warrants, 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.

For convertible financial instruments classified as debt,
the consolidated comprehensive net income (loss) is adjusted to reflect the profit or loss which would have been reported in the period if the debt instrument had been converted immediately at the beginning of the period. These adjustments to profit
or loss and the equivalent shares realizable on conversion are not included in the diluted earnings per share calculation when the effect would be anti-dilutive.

Flow-Through Shares

The Company finances a portion of its exploration activities through the issuance of
flow-through shares. On the date of issuance of the flow-through shares, the premium relating to the proceeds received in excess of the closing market price of the Companys common shares is allocated to liabilities.

Under the terms of the flow-through common share issues, the tax attributes of the related expenditures are renounced to investors and deferred income tax expense
and deferred tax liabilities are increased by the estimated income tax benefits renounced by the Company to the investors. The premium liability is reduced pro-rata based on the actual amount of flow-through eligible expenditures incurred during the
reporting period. The reduction to the premium is recognized through profit or loss as other income.



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Segment Reporting

An operating segment is a component of the Company that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the
Companys other components. All operating segments operating results are reviewed regularly by the Companys executive team to make decisions about resources to be allocated to the segment and assess its performance, and for which
discrete financial information is available.

Segment results that are reported to the executive team include items directly attributable to a segment as
well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly corporate assets (primarily the Companys headquarters), head office expenses, and deferred tax assets and liabilities.

Segment capital expenditures are the total costs incurred during the period to acquire property, plant and equipment, and goodwill.

Adoption of New Accounting Standards

The following
new accounting standards have been adopted by the Company.

IFRS 7 Financial Instruments: Disclosures

The amendments to IFRS 7 require disclosure of information that enables users of financial statements to understand the relationship between
transferred financial assets that are not derecognized in their entirety and the associated liabilities; and to evaluate the nature of, and risks associated with, the entitys continuing involvement in derecognized financial assets. This update
is effective for years beginning on or after July 1, 2011. Where applicable, disclosures in these consolidated financial statements have been prepared in accordance with the Companys adoption of this standard.

New standards and interpretations not yet adopted

The following new standards, amendments to standards and interpretations are not yet effective for the year ended December 31, 2012 or have otherwise not yet been adopted by the Company. The Company is
evaluating the impact, if any, adoption of the standards will have on the disclosures in the Companys consolidated financial statements:

IFRS 9 Financial Instruments: Classification and Measurement

This is the first part of
a new standard on classification and measurement of financial assets that will replace IAS 39, Financial Instruments: Recognition and Measurement. IFRS 9 has two measurement categories: amortized cost and fair value. All equity instruments are
measured at fair value. A debt instrument is at amortized cost only if the entity is holding it to collect contractual cash flows and the cash flows represent principal and interest. Otherwise, it is at fair value through profit or loss. An update
to IFRS 9 includes guidance on financial liabilities and derecognition of financial instruments. This standard and the related update are effective for years beginning on or after January 1, 2015. This amendment is presently not expected to
impact the consolidated financial statements of the Company.

IAS 1 Presentation of Financial Statements

This standard is amended to change the disclosure of items presented in other comprehensive income (OCI), including a requirement to
separate items presented in OCI into two groups based on whether or not they may be recycled to profit or loss in the future. The amendment is effective for reporting years beginning on or after July 1, 2012. This amendment is presently not
expected to impact the consolidated financial statements of the Company.

IAS 19 Employee Benefits

The standard is amended to reflect significant changes to recognition and measurement of defined benefit pension expense and termination benefits,
and provides expanded disclosure requirements. The amendment is effective for



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annual periods beginning on or after January 1, 2013. This amendment is presently not expected to impact the consolidated financial statements of the Company.

IAS 32 Financial Instruments: Presentation

This standard is amended to clarify requirements for offsetting of financial assets and financial liabilities. The amendment is effective for annual periods beginning on or after January 1, 2014. Management is
evaluating the impact, if any, the adoption of this amendment to IAS 32 will have on the disclosures in its consolidated financial statements.

New Standards Addressing the Scope of a Reporting Entity

The following IFRS standards
are introduced and IAS standards amended accordingly, for which the Company is evaluating the impact, if any, adoption of the standards will have on the disclosures in the Companys consolidated financial statements:

IFRS 10 Consolidated Financial Statements

This standard replaces the guidance on control and consolidation in IAS 27, Consolidated and Separate Financial Statements, and SIC-12, Consolidation  Special Purpose Entities. IFRS 10 changes the definition
of control under IFRS so that the same criteria are applied to all entities to determine control.

IFRS 11 Joint Arrangements

This standard replaces IAS 31, Interests in Joint Ventures. IFRS 11 reduces the types of joint arrangements to two: joint
ventures and joint operations. IFRS 11 requires the use of equity accounting for interests in joint ventures, eliminating the existing policy choice of proportionate consolidation for jointly controlled entities under IAS 31. Entities that
participate in joint operations will follow accounting much like that for jointly controlled assets and jointly controlled operations under IAS 31.

IFRS 12 Disclosures of Interests in Other Entities

This standard sets out the
disclosure requirements for entities reporting under IFRS 10 and IFRS 11, and replaces the disclosure requirements currently found in IAS 28, Investments in Associates.

IAS 27 Consolidated and Separate Financial Statements

This standard is renamed
Separate Financial Statements and deals solely with separate financial statements, the guidance for which remains unchanged.

All above standards and amendments are effective for reporting years beginning on or after January 1, 2013.

IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Interests in Other Entities, IAS 27 Consolidated
and Separate Financial Statements

IFRS 10, IFRS 11, IFRS 12, and IAS 27 have been amended to clarify the date of initial
application of IFRS 10 and require certain disclosures under IFRS 12 on transition. The standards, as amended, are effective for years beginning on or after January 1, 2013. This amendment is presently not expected to impact the consolidated
financial statements of the Company.

IFRS 13 Fair Value Measurement

The new standard provides a single source of guidance on how to measure fair value where its use is already required or permitted by other IFRS and
enhances disclosure requirements for information about fair value measurements. The standard is effective for reporting years beginning on or after January 1, 2013.



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IFRIC 20 - Stripping Costs in the Production Phase of a Surface
Mine

On October 20, 2011, the IASB issued a new interpretation, IFRIC 20, to address accounting issues regarding waste
removal costs incurred in surface mining activities during the production phase of a mine, referred to as production stripping costs. The new interpretation addresses the classification and measurement of production stripping costs as either
inventory or as a tangible or intangible non-current stripping activity asset. The standard also provides guidance for the depreciation or amortization and impairment of such assets.

IFRIC 20 is effective for reporting years beginning on or after January 1, 2013, although earlier application is permitted. This amendment is
presently not expected to impact the consolidated financial statements of the Company.

4.     DISCONTINUED OPERATIONS AND ASSETS
HELD FOR SALE



The Company is in the process
of disposing of its interest in its gold division through the disposal of all of the shares of its wholly-owned subsidiary NAP Quebec or sale of the related net assets. At December 31, 2012, management was committed to a plan to sell the gold
division and an active program to locate a buyer and complete the plan had been initiated. The Company expects to complete the sale of NAP Quebec during 2013. As a result, the Company has presented the consolidated financial statements to segregate
discontinued operations and related financial assets and liabilities held for sale from those balances relating to the Companys continuing operations as at December 31, 2012.

Assets and liabilities held for sale

The carrying values of the major classes of assets and liabilities
included as part of NAP Quebec on the consolidated balance sheet were reclassified as assets and liabilities of a disposal group classified as held for sale as at December 31, 2012. The balances reported consist of the following:



|                                                            |  |                |           | 
|----------------------------------------------------------- |  | -------------- | --------- | 
|                                                            |  | At December 31 |          
|                                                            |  | 2012           |          
|Assets of a disposal group classified as held for sale      |  |                |           | 
|Cash and cash equivalents                                   |  |                | $  553    | 
|Taxes receivable                                            |  |                | 4,522     | 
|Inventories                                                 |  |                | 7,257     | 
|Other current assets                                        |  |                | 770       | 
|Mining Interests                                            |  |                | 16,712    | 
|                                                            |  |                | $  29,814 | 
|Liabilities of a disposal group classified as held for sale |  |                |           | 
|Accounts payable and accrued liabilities                    |  |                | $  5,908  | 
|Obligations under finance leases                            |  |                | 58        | 
|Asset retirement obligation                                 |  |                | 6,105     | 
|                                                            |  |                | $  12,071 | 

At December 31, 2012, the Company tested the gold division for impairment using the fair value of the expected purchase
consideration less cost to sell as the recoverable amount. In performing the impairment test, the Company concluded that the recoverable amount of the gold division was lower than the carrying value. As a result, the Company has recognized an
impairment loss of $56.0 million for the year ended December 31, 2012. Refer to note 8 for details.



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Net loss from discontinued operations

Loss and comprehensive loss related to NAP Quebec have been segregated from continuing operations. Loss from discontinued operations consists of the following:



|                                              |  |      |    |  |      |  |            |      |  |  |            |  
|--------------------------------------------- |  | ---- | -- |  | ---- |  | ---------- | ---- |  |  | ---------- | -
|                                              |  | Note |    |  | 2012 |  |            | 2011 | 
|Revenue                                       |  |      |    |  |      |  | $  3,004   |      |  |  | $  26,813  |  
|                                              |  |      |   
|Mining operating expenses                     |  |      |    |  |      |  |            |      |  |  |            |  
|Production costs                              |  |      |    |  |      |  | 2,153      |      |  |  | 31,601     |  
|Smelting, refining and freight costs          |  |      |    |  |      |  | 16         |      |  |  | 54         |  
|Depreciation and amortization                 |  |      |    |  |      |  | 199        |      |  |  | 7,460      |  
|Gold assets impairment charge                 |  |      |    |  |      |  | 56,023     |      |  |  | 49,210     |  
|Gain on disposal of equipment                 |  |      |    |  |      |  | (435       | )    |  |  | (27        | )
|Gold mine closure, care and maintenance costs |  |      |    |  |      |  | 1,463      |      |  |  | -          |  
|Total mining operating expenses               |  |      |    |  |      |  | 59,419     |      |  |  | 88,298     |  
|Loss from mining operations                   |  |      |    |  |      |  | (56,415    | )    |  |  | (61,485    | )
|                                              |  |      |   
|Other expenses                                |  |      |    |  |      |  |            |      |  |  |            |  
|Exploration                                   |  |      |    |  |      |  | 2,768      |      |  |  | 6,728      |  
|General and administration                    |  |      |    |  |      |  | 62         |      |  |  | 82         |  
|Other income                                  |  |      |    |  |      |  | (37        | )    |  |  | (34        | )
|Interest expense and other costs              |  |      |    |  |      |  | 130        |      |  |  | 111        |  
|Total other expenses                          |  |      |    |  |      |  | 2,923      |      |  |  | 6,887      |  
|Loss before taxes                             |  |      |    |  |      |  | (59,338    | )    |  |  | (68,372    | )
|Income and mining tax recovery (expense)      |  |      | 22 |  |      |  | 4,704      |      |  |  | (1,174     | )
|Loss and comprehensive loss for the year      |  |      |    |  |      |  | $  (54,634 | )    |  |  | $  (69,546 | )

Cash flows from discontinued operations

Cash flows related to NAP Quebec have been segregated from continuing operations. Net cash flows provided by (used in) discontinued operations consist of the following:



|                                         |  |      |            |   |      |  |            |  
|---------------------------------------- |  | ---- | ---------- | - | ---- |  | ---------- | -
|                                         |  | 2012 |            |   | 2011 | 
|Cash flow provided by (used in):         |  |      |            |   |      |  |            |  
|Operations                               |  |      | $  (7,742  | ) |      |  | $  (12,529 | )
|Financing                                |  |      | (160       | ) |      |  | 1,724      |  
|Investing                                |  |      | (23,399    | ) |      |  | (37,276    | )
|Net cash used in discontinued operations |  |      | $  (31,301 | ) |      |  | $  (48,081 | )



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5.     ACCOUNTS RECEIVABLE



Accounts receivable consist of the following:



|                                        |  |                    |           |  |                    |  |           | 
|--------------------------------------- |  | ------------------ | --------- |  | ------------------ |  | --------- | 
|                                        |  | At December 312012 |           |  | At December 312011 | 
|Accounts receivable                     |  |                    | $  53,922 |  |                    |  | $  71,097 | 
|Unrealized gain on financial contracts1 |  |                    | -         |  |                    |  | 1,951     | 
|Accounts receivable                     |  |                    | $  53,922 |  |                    |  | $  73,048 | 



|1 | As at December 31, 2012, a total of 55,000 ounces of past palladium production
delivered and sold to a smelter, was priced using forward prices for the month of final settlement at an average price of $640 per ounce of palladium (December 31, 2011  69,500 ounces of palladium at an average price of $697 per ounce). Refer
to notes 10 and 16.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Accounts receivable represents the value of all platinum group metals (PGMs), gold and certain
base metals contained in LDIs concentrate shipped for smelting and refining, using the December 31, 2012 forward metal prices for the month of final settlement, and for which significant risks and rewards have transferred to third
parties.

All of the accounts receivable are due from three customers at December 31, 2012 (December 31, 2011  two customers). A reserve for
doubtful accounts has not been established, as in the opinion of management, the amount due will be fully collected. The Company is not economically dependent on its customers, refer to note 16.

Accounts receivable have been pledged as security against a one-year US$60.0 million credit facility with a Canadian chartered bank, which is to be used for working
capital liquidity and general corporate purposes. Under the credit facility, the Company utilized US$17.3 million for letters of credit primarily for reclamation deposits and has taken a drawdown of US$15.2 million ($15.1 million), leaving US$27.5
million available at December 31, 2012.

6.     INVENTORIES



Inventories consist of the following:



|                                     |  |                    |           |  |                    |  |           | 
|------------------------------------ |  | ------------------ | --------- |  | ------------------ |  | --------- | 
|                                     |  | At December 312012 |           |  | At December 312011 | 
|Supplies1                            |  |                    | $  10,633 |  |                    |  | $  11,209 | 
|Gold inventory1,2                    |  |                    | -         |  |                    |  | 6,068     | 
|Concentrate inventory                |  |                    | 1,587     |  |                    |  | 141       | 
|Crushed and broken ore
stockpiles1,3 |  |                    | 3,168     |  |                    |  | 2,628     | 
|Total                                |  |                    | $  15,388 |  |                    |  | $  20,046 | 



|1 | For 2012, gold and supplies inventory relating to discontinued operations amounting to $7,257 has been reclassified as held for sale. Refer to note 4.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------

|2 | Gold inventory is comprised of unprocessed ore either in stockpiles or bins, unrecovered gold in either carbon or solution within the milling circuit, and
gold-silver doré bars produced but not sold as at the reporting date.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3 | Crushed and broken ore stockpiles represent coarse ore that has been extracted from the mine and is available for further processing. The amount of ore
stockpiles that is not expected to be processed within one year, if any, is shown as a long-term asset.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

All inventory amounts are
carried at cost for the periods presented with the exception of gold inventories which are written down to net realizable value.

Supplies inventory of
$27,604 were recognized as an expense during the year ended December 31, 2012 (2011  $24,111).

The company recognized a write-down of
obsolete supplies inventory of $nil for the year ended December 31, 2012 (2011  $1,352).



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7.     OTHER ASSETS





|                                               |  |  |                    |  |  |  |                    | 
|---------------------------------------------- |  |  | ------------------ |  |  |  | ------------------ | 
|Other assets consist of the following:         |  |  |                    |  |  | 
|                                               |  |  | At December 312012 |  |  |  | At December 312011 | 
|Prepaids1                                      |  |  | $  1,375           |  |  |  | $  695             | 
|Sales taxes receivable1                        |  |  | 7,065              |  |  |  | 8,501              | 
|Receivable from Ministry of Natural Resources2 |  |  | -                  |  |  |  | 1,769              | 
|Other1                                         |  |  | 8                  |  |  |  | 290                | 
|                                               |  |  | $  8,448           |  |  |  | $  11,255          | 

|1 | For 2012, other assets relating to discontinued operations amounting to $5,292 have been reclassified as held for sale . Refer to note 4.
|- | -----------------------------------------------------------------------------------------------------------------------------------------

|2 | In 2011, the Company issued a letter of credit related to the Sleeping Giant mine and mill closure plan, replacing the mine closure deposit. The Ministry of
Natural Resources acknowledged receipt of the letter of credit in 2011 and the cash proceeds were received in the first quarter of 2012.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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8.     MINING INTERESTS



Mining interests are comprised of the following:



|                                                                  |  |                    |           |   |                             |  |            |                               |  |  |                                                         |   |  |                       |           |   |       |  |           |   |  |  |            |  
|----------------------------------------------------------------- |  | ------------------ | --------- | - | --------------------------- |  | ---------- | ----------------------------- |  |  | ------------------------------------------------------- | - |  | --------------------- | --------- | - | ----- |  | --------- | - |  |  | ---------- | -
|                                                                  |  | Plant andequipment |           |   | Undergroundminedevelopment1 |  |            | Equipmentunder 
financelease2 |  |  | Mining leasesand claims,royaltyinterest, anddevelopment |   |  | Explorationproperties |           |   | Total | 
|Cost or deemed cost                                               |  |                    |           |   |                             |  |            |                               |  |  |                                                         |   |  |                       |           |   |       |  |           |   |  |  |            |  
|Balance at January 1, 2011                                        |  |                    | $  38,469 |   |                             |  | $  73,214  |                               |  |  | $  4,951                                                |   |  |                       | $  8,679  |   |       |  | $  21,873 |   |  |  | $  147,186 |  
|Additions of physical assets  continuing operations              |  |                    | 6,164     |   |                             |  | 135,358    |                               |  |  | 3,669                                                   |   |  |                       | 5,429     |   |       |  | -         |   |  |  | 150,620    |  
|Additions of physical assets  discontinued operations            |  |                    | 2,133     |   |                             |  | 6,981      |                               |  |  | 274                                                     |   |  |                       | -         |   |       |  | 28,507    |   |  |  | 37,895     |  
|Revaluation of ARO assets  continuing operations                 |  |                    | 5,717     |   |                             |  | -          |                               |  |  | -                                                       |   |  |                       | -         |   |       |  | -         |   |  |  | 5,717      |  
|Revaluation of ARO assets  discontinued operations               |  |                    | 21        |   |                             |  | -          |                               |  |  | -                                                       |   |  |                       | -         |   |       |  | -         |   |  |  | 21         |  
|Capitalization of borrowing costs                                 |  |                    | -         |   |                             |  | 1,574      |                               |  |  | -                                                       |   |  |                       | -         |   |       |  | -         |   |  |  | 1,574      |  
|Reclassification of costs for finance leases maturing in the year |  |                    | -         |   |                             |  | 1,510      |                               |  |  | (1,510                                                  | ) |  |                       | -         |   |       |  | -         |   |  |  | -          |  
|Disposals  continuing operations                                 |  |                    | (1,419    | ) |                             |  | (150       | )                             |  |  | -                                                       |   |  |                       | -         |   |       |  | -         |   |  |  | (1,569     | )
|Disposals  discontinued operations                               |  |                    | (22       | ) |                             |  | -          |                               |  |  | -                                                       |   |  |                       | -         |   |       |  | -         |   |  |  | (22        | )
|Balance at December 31, 2011                                      |  |                    | $  51,063 |   |                             |  | $  218,487 |                               |  |  | $  7,384                                                |   |  |                       | $  14,108 |   |       |  | $  50,380 |   |  |  | $  341,422 |  
|Balance at January 1, 2012                                        |  |                    | $  51,063 |   |                             |  | $  218,487 |                               |  |  | $  7,384                                                |   |  |                       | $  14,108 |   |       |  | $  50,380 |   |  |  | $  341,422 |  
|Additions of physical assets  continuing operations              |  |                    | 12,613    |   |                             |  | 131,580    |                               |  |  | 12,504                                                  |   |  |                       | 1,645     |   |       |  | -         |   |  |  | 158,342    |  
|Additions of physical assets  discontinued operations            |  |                    | 381       |   |                             |  | 68         |                               |  |  | 669                                                     |   |  |                       | -         |   |       |  | 26,955    |   |  |  | 28,073     |  
|Revaluation of ARO assets  continuing operations                 |  |                    | 1,047     |   |                             |  | -          |                               |  |  | -                                                       |   |  |                       | -         |   |       |  | -         |   |  |  | 1,047      |  
|Revaluation of ARO assets  discontinued operations               |  |                    | 483       |   |                             |  | -          |                               |  |  | -                                                       |   |  |                       | -         |   |       |  | -         |   |  |  | 483        |  
|Capitalization of borrowing costs                                 |  |                    | -         |   |                             |  | 7,999      |                               |  |  | -                                                       |   |  |                       | -         |   |       |  | -         |   |  |  | 7,999      |  
|Reclassification of costs for finance leases maturing in the year |  |                    | -         |   |                             |  | (361       | )                             |  |  | 408                                                     |   |  |                       | -         |   |       |  | -         |   |  |  | 47         |  
|Other reclassifications  discontinued operations                 |  |                    | 363       |   |                             |  | -          |                               |  |  | (60                                                     | ) |  |                       | -         |   |       |  | (293      | ) |  |  | 10         |  
|Disposals  continuing operations                                 |  |                    | (4,292    | ) |                             |  | (12,654    | )                             |  |  | (500                                                    | ) |  |                       | -         |   |       |  | -         |   |  |  | (17,446    | )
|Transfer of disposal group classified as held for sale            |  |                    | (13,047   | ) |                             |  | (45,926    | )                             |  |  | (909                                                    | ) |  |                       | (1,000    | ) |       |  | (77,042   | ) |  |  | (137,924   | )
|Balance at December 31, 2012                                      |  |                    | $  48,611 |   |                             |  | $  299,193 |                               |  |  | $  19,496                                               |   |  |                       | $  14,753 |   |       |  | $  -      |   |  |  | $  382,053 |  



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|                                                                  |  |                    |           |   |                             |  |            |                               |  |  |                                                         |   |  |                       |           |   |       |  |           |   |  |  |            |  
|----------------------------------------------------------------- |  | ------------------ | --------- | - | --------------------------- |  | ---------- | ----------------------------- |  |  | ------------------------------------------------------- | - |  | --------------------- | --------- | - | ----- |  | --------- | - |  |  | ---------- | -
|                                                                  |  | Plant andequipment |           |   | Undergroundminedevelopment1 |  |            | Equipmentunder 
financelease2 |  |  | Mining leasesand claims,royaltyinterest, anddevelopment |   |  | Explorationproperties |           |   | Total | 
|Depreciation and impairment losses                                |  |                    |           |   |                             |  |            |                               |  |  |                                                         |   |  |                       |           |   |       |  |           |   |  |  |            |  
|Balance at January 1, 2011                                        |  |                    | $  9,072  |   |                             |  | $  9,937   |                               |  |  | $  462                                                  |   |  |                       | $  1,429  |   |       |  | $  -      |   |  |  | $  20,900  |  
|Depreciation for the period  continuing operations               |  |                    | 2,453     |   |                             |  | 6,128      |                               |  |  | 707                                                     |   |  |                       | 855       |   |       |  | -         |   |  |  | 10,143     |  
|Depreciation for the period  discontinued operations             |  |                    | 2,129     |   |                             |  | 5,101      |                               |  |  | 79                                                      |   |  |                       | 146       |   |       |  | -         |   |  |  | 7,455      |  
|Impairment loss  discontinued operations                         |  |                    | 1,674     |   |                             |  | 33,568     |                               |  |  | -                                                       |   |  |                       | 480       |   |       |  | 11,673    |   |  |  | 47,395     |  
|Disposals  continuing operations                                 |  |                    | (469      | ) |                             |  | (150       | )                             |  |  | -                                                       |   |  |                       | -         |   |       |  | -         |   |  |  | (619       | )
|Disposals  discontinued operations                               |  |                    | (11       | ) |                             |  | -          |                               |  |  | -                                                       |   |  |                       | -         |   |       |  | -         |   |  |  | (11        | )
|Balance at December 31, 2011                                      |  |                    | $  14,848 |   |                             |  | $  54,584  |                               |  |  | $  1,248                                                |   |  |                       | $  2,910  |   |       |  | $  11,673 |   |  |  | $  85,263  |  
|Balance at January 1, 2012                                        |  |                    | $  14,848 |   |                             |  | $  54,584  |                               |  |  | $  1,248                                                |   |  |                       | $  2,910  |   |       |  | $  11,673 |   |  |  | $  85,263  |  
|Depreciation for the period  continuing operations               |  |                    | 3,404     |   |                             |  | 13,160     |                               |  |  | 2,854                                                   |   |  |                       | 1,064     |   |       |  | -         |   |  |  | 20,482     |  
|Depreciation for the period  discontinued operations             |  |                    | 160       |   |                             |  | 22         |                               |  |  | 17                                                      |   |  |                       | -         |   |       |  | -         |   |  |  | 199        |  
|Impairment loss  discontinued operations                         |  |                    | -         |   |                             |  | -          |                               |  |  | -                                                       |   |  |                       | -         |   |       |  | 56,023    |   |  |  | 56,023     |  
|Reclassification of costs for finance leases maturing in the year |  |                    | -         |   |                             |  | 18         |                               |  |  | (18                                                     | ) |  |                       | -         |   |       |  | -         |   |  |  | -          |  
|Other reclassifications  discontinued operations                 |  |                    | 11        |   |                             |  | -          |                               |  |  | (60                                                     | ) |  |                       | 60        |   |       |  | 54        |   |  |  | 65         |  
|Disposals  continuing operations                                 |  |                    | (251      | ) |                             |  | (1,936     | )                             |  |  | (71                                                     | ) |  |                       | -         |   |       |  | -         |   |  |  | (2,258     | )
|Disposals  discontinued operations                               |  |                    | -         |   |                             |  | -          |                               |  |  | -                                                       |   |  |                       | -         |   |       |  | -         |   |  |  | -          |  
|Transfer of disposal group classified as held for sale            |  |                    | (6,883    | ) |                             |  | (45,538    | )                             |  |  | (42                                                     | ) |  |                       | (1,000    | ) |       |  | (67,750   | ) |  |  | (121,213   | )
|Balance at December 31, 2012                                      |  |                    | $  11,289 |   |                             |  | $  20,310  |                               |  |  | $  3,928                                                |   |  |                       | $  3,034  |   |       |  | $  -      |   |  |  | $  38,561  |  
|Carrying amounts                                                  |  |                    |           |   |                             |  |            |                               |  |  |                                                         |   |  |                       |           |   |       |  |           |   |  |  |            |  
|As at December 31, 2011                                           |  |                    | $  36,215 |   |                             |  | $  163,903 |                               |  |  | $  6,136                                                |   |  |                       | $  11,198 |   |       |  | $  38,707 |   |  |  | $  256,159 |  
|As at December 31, 2012                                           |  |                    | $  37,322 |   |                             |  | $  278,883 |                               |  |  | $  15,568                                               |   |  |                       | $  11,719 |   |       |  | $  -      |   |  |  | $  343,492 |  



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|1 | For year ended December 31, 2012, $7,999 (2011 - $1,573) of interest costs on long-term debt was capitalized to mining interests.
|- | ---------------------------------------------------------------------------------------------------------------------------------

|2 | In 2012, the Company established a $15.0 million lease facility to fund equipment for the LDI mine expansion, of which $14.1 million ($9.8 million, net
of repayments) had been utilized as at December 31, 2012 for finance leases. The Company entered into this leasing arrangement by way of a sale-leaseback as the equipment had been previously purchased. As the equipment had a net book value of
$10.5 million, the net amount of $0.8 million has been included in Obligations under finance leases, to be amortized over the 5 year lease term as a credit to Depreciation and amortization. Refer to note 11.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Gold assets impairment charge

The Company announced on
January 17, 2012 that it is discontinuing production at the Sleeping Giant mine.

After reviewing various mining scenarios, the Company concluded
that mining would likely continue at high costs given the lack of grade continuity, with insufficient operating margin to justify continuing operations. The Company has therefore ceased mining operations at Sleeping Giant and has restructured the
gold division, resulting in a non-cash impairment charge on its gold assets of $49.2 million for the year ended December 31, 2011.

At
December 31, 2012, the Company tested the gold division for impairment using the fair value of the expected purchase consideration less cost to sell as the recoverable amount. In performing the impairment test, the Company concluded that the
recoverable amount of the gold division was lower than the carrying value. As a result, the Company has recognized an impairment loss of $56.0 million for the year ended December 31, 2012. Refer to note 4 for details.

Asset restrictions and contractual commitments

The
Companys assets are subject to certain restrictions on title and property, plant and equipment. Certain assets are pledged as security for credit agreement arrangements and senior secured lenders.

9.     ASSET RETIREMENT OBLIGATIONS AND RECLAMATION DEPOSITS



At December 31, 2012, the changes in asset retirement
and the related mine restoration deposit are as follows:



|                                                                   |  |                |           |  
|------------------------------------------------------------------ |  | -------------- | --------- | -
|                                                                   |  | At December 31 |          
|                                                                   |  | 2012           |          
|Asset retirement obligation, beginning of period                   |  |                | $  20,881 |  
|Change in discount rate and estimated closure costs (note 8)       |  |                | 1,530     |  
|Asset retirement amounts paid                                      |  |                | (1,448    | )
|Accretion expense                                                  |  |                | 356       |  
|Asset retirement obligation, end of period                         |  |                | $  21,319 |  
|Transfer discontinued operations to held for sale (note 4)         |  |                | (6,105    | )
|Asset retirement obligation, end of period  continuing operations |  |                | $  15,214 |  



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North American Palladium Ltd.





|                         |  |                              |      |  |                           |  |           |                             |  |  |                            |  |  |                                        |           |  |  |  |           | 
|------------------------ |  | ---------------------------- | ---- |  | ------------------------- |  | --------- | --------------------------- |  |  | -------------------------- |  |  | -------------------------------------- | --------- |  |  |  | --------- | 
|Property                 |  | Expected timingof cash flows |      |  | Assetretirementobligation |  |           | Mineclosure planrequirement |  |  | Letter ofcreditoutstanding |  |  | Undiscountedasset
retirementobligation |          
|Continuing Operations:   |  |                              |      |  |                           |  |           |                             |  |  |                            |  |  |                                        |           |  |  |  |           | 
|LDI mine                 |  |                              | 2020 |  |                           |  | $  15,214 |                             |  |  | $  14,055                  |  |  |                                        | $  14,055 |  |  |  | $  17,335 | 
|Discontinued Operations: |  |                              |      |  |                           |  |           |                             |  |  |                            |  |  |                                        |           |  |  |  |           | 
|Sleeping Giant mill1,2   |  |                              | 2021 |  |                           |  | $  4,982  |                             |  |  | $  1,920                   |  |  |                                        | $  1,880  |  |  |  | $  5,803  | 
|Sleeping Giant mine1,2   |  |                              | 2013 |  |                           |  | 668       |                             |  |  | -                          |  |  |                                        | -         |  |  |  | 668       | 
|Vezza gold
mine1,2       |  |                              | 2021 |  |                           |  | 455       |                             |  |  | -                          |  |  |                                        | -         |  |  |  | 533       | 
|                         |  |                              |      |  |                           |  | $  6,105  |                             |  |  | $  1,920                   |  |  |                                        | $  1,880  |  |  |  | $  7,004  | 



|1 | The asset retirement obligations relating to discontinued operations have been reclassified as held for sale at December 31, 2012. Refer to Note 4.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------

|2 | The mine closure plan requirement and the letter of credit outstanding for the Sleeping Giant mill are inclusive of the requirements for the Sleeping Giant
mine and the Vezza gold mine. Including a letter of credit for Shebandown West project, the total letters of credit outstanding are $16.3 million.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Asset retirement obligations are comprised of the following as at December 31, 2011:



|                     |  |                              |      |  |                           |  |           |                              |  |  |                             |  |  |                                       |           |  |  |  |           | 
|-------------------- |  | ---------------------------- | ---- |  | ------------------------- |  | --------- | ---------------------------- |  |  | --------------------------- |  |  | ------------------------------------- | --------- |  |  |  | --------- | 
|Property             |  | Expected timingof cash flows |      |  | Assetretirementobligation |  |           | Mine
closure planrequirement |  |  | Letter of
creditoutstanding |  |  | Undiscountedassetretirementobligation |          
|LDI mine             |  |                              | 2020 |  |                           |  | $  13,905 |                              |  |  | $  12,997                   |  |  |                                       | $  8,466  |  |  |  | $  16,312 | 
|Sleeping Giant mill1 |  |                              | 2021 |  |                           |  | 4,426     |                              |  |  | 1,920                       |  |  |                                       | 1,769     |  |  |  | 5,360     | 
|Sleeping Giant mine1 |  |                              | 2012 |  |                           |  | 2,116     |                              |  |  | -                           |  |  |                                       | -         |  |  |  | 1,448     | 
|Vezza gold
mine1     |  |                              | 2021 |  |                           |  | 434       |                              |  |  | -                           |  |  |                                       | -         |  |  |  | 533       | 
|                     |  |                              |      |  |                           |  | $  20,881 |                              |  |  | $  14,917                   |  |  |                                       | $  10,235 |  |  |  | $  23,653 | 



|1 | The mine closure plan requirement and the letter of credit outstanding for the Sleeping Giant mill are inclusive of the requirements for the Sleeping Giant
mine and the Vezza gold mine. Including a letter of credit for Shebandowan West project, the total letters of credit outstanding are $10.6 million.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The key assumptions applied for determination of the ARO obligation are as follows as at:



|                          |  |                |      |  |                |  |      | 
|------------------------- |  | -------------- | ---- |  | -------------- |  | ---- | 
|                          |  | At December 31 |      |  | At December 31 | 
|                          |  |                | 2012 |  |                |  | 2011 | 
|Continuing Operations:    |  |                |      |  |                |  |      | 
|Inflation                 |  |                | 2.00 |  |                |  | 2.00 | 
|Market risk               |  |                | 5.00 |  |                |  | 5.00 | 
|Discount rate             |  |                | 1.63 |  |                |  | 1.84 | 
|Discontinued Operations1: |  |                |      |  |                |  |      | 
|Inflation                 |  |                | 2.00 |  |                |  | 2.00 | 
|Market risk               |  |                | 5.00 |  |                |  | 5.00 | 
|Discount rate             |  |                | 1.71 |  |                |  | 1.93 | 



|1 | Comparative data for the key assumptions applied, at December 31, 2011, relating to discontinued operations is provided for information purposes. The
comparative assumptions for discontinued operations are included in the weighted-average rates shown for continuing operations at December 31, 2011.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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North American Palladium Ltd.



The asset retirement obligation may change materially based on future changes in
operations, costs of reclamation and closure activities, and regulatory requirements. During the period, the mine closure obligations were revised to reflect the Companys most current closure cost estimates, expected mine lives and market rate
assumptions.

10.     ACCOUNTS PAYABLE AND ACCRUED LIABILITIES



Accounts payable and accrued liabilities are comprised of:



|                                          |  |                |           |  |                |  |           | 
|----------------------------------------- |  | -------------- | --------- |  | -------------- |  | --------- | 
|                                          |  | At December 31 |           |  | At December 31 | 
|                                          |  |                | 2012      |  |                |  | 2011      | 
|Accounts payable and accrued liabilities1 |  |                | $  55,238 |  |                |  | $  42,436 | 
|Unrealized loss on financial contracts2   |  |                | 3,236     |  |                |  | -         | 
|Accounts payable and accrued liabilities  |  |                | $  58,474 |  |                |  | $  42,436 | 



|1 | For 2012, accounts payable and accrued liabilities relating to discontinued operations amounting to $5,908 has been reclassified as held for sale. Refer to
note 4.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2 | As at December 31, 2012, a total of 55,000 ounces of past palladium production that had been delivered and sold to a smelter, was priced using forward
prices for the month of final settlement at an average price of $640 per ounce (December 31, 2011  69,500 ounces at an average price of $697 per ounce). Refer to notes 5 and 16.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11.     LEASES



At the respective reporting dates, the Company was party to the following lease arrangements:

FINANCE LEASES (OBLIGATIONS UNDER FINANCE LEASES)

The Company leases production equipment under a number of
finance lease agreements. Some leases provide the Company with the option to purchase the equipment at a beneficial price. The leased equipment secures the lease obligations. The net carrying amount of leased plant and equipment at each reporting
date is summarized in Note 8 under the category of equipment under finance leases.

The following is a schedule of future minimum lease payments under
finance leases together with the present value of the net minimum lease payments at each reporting date:



|                           |  |                   |                            |  |                   |  |          |  |  |  |                                     |  |  |  |                            |  |  |  |          |  |  |  |                                     | 
|-------------------------- |  | ----------------- | -------------------------- |  | ----------------- |  | -------- |  |  |  | ----------------------------------- |  |  |  | -------------------------- |  |  |  | -------- |  |  |  | ----------------------------------- | 
|                           |  | December 31, 2012 |                            |  | December 31, 2011 | 
|                           |  |                   | Futureminimumleasepayments |  |                   |  | Interest |  |  |  | Presentvalue ofminimumleasepayments |  |  |  | Futureminimumleasepayments |  |  |  | Interest |  |  |  | Presentvalue ofminimumleasepayments | 
|Less than one year         |  |                   | $  4,374                   |  |                   |  | $  657   |  |  |  | $3,717                              |  |  |  | $  2,677                   |  |  |  | $  249   |  |  |  | $  2,428                            | 
|Between one and five years |  |                   | 10,963                     |  |                   |  | 1,007    |  |  |  | 9,956                               |  |  |  | 2,228                      |  |  |  | 124      |  |  |  | 2,104                               | 
|                           |  |                   | $  15,337                  |  |                   |  | $  1,664 |  |  |  | $13,673                             |  |  |  | $  4,905                   |  |  |  | $  373   |  |  |  | $  4,532                            | 
|Less current portion       |  |                   |                            |  |                   |  |          |  |  |  | 3,717                               |  |  |  |                            |  |  |  |          |  |  |  | 2,428                               | 
|                           |  |                   |                            |  |                   |  |          |  |  |  | $9,956                              |  |  |  |                            |  |  |  |          |  |  |  | $  2,104                            | 

During 2012, the Company established a $15.0 million finance lease facility to fund equipment for the LDI mine expansion, of which
$14.1 million ($9.8 million, net of repayments) had been utilized as at December 31, 2012. The Company entered into this leasing arrangement by way of a sale-leaseback as the equipment had been previously purchased. As the equipment had a net
book value of $10.5 million, the net amount of $0.8 million has been included in Obligations under finance leases, to be amortized over the 5 year lease term as a credit to Depreciation and amortization. See note 8.



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North American Palladium Ltd.



OPERATING LEASES

The Company, from time to time, enters into leasing arrangements for production and other equipment under a number of operating leases. These leases are generally short-term in nature and subject to cancellation
clauses. The Company periodically reviews the nature of these leases to identify if there have been any significant changes to the terms and use of the items under operating lease which would require reclassification as a finance lease. Such changes
are considered to indicate a renewal of the lease terms and the reclassification is applied prospectively from the date the revised lease terms become effective.

The following schedule provides the future minimum lease payments under non-cancellable operating leases outstanding at each of the reporting dates:



|                           |  |                |          |  |                |  |          | 
|-------------------------- |  | -------------- | -------- |  | -------------- |  | -------- | 
|                           |  | At December 31 |          |  | At December 31 | 
|                           |  |                | 2012     |  |                |  | 2011     | 
|Less than one year         |  |                | $  2,761 |  |                |  | $  3,783 | 
|Between one and five years |  |                | 3,960    |  |                |  | 2,918    | 
|More than five years       |  |                | -        |  |                |  | 193      | 
|                           |  |                | $  6,721 |  |                |  | $  6,894 | 

The total minimum lease payments recognized in expense during each of the stated year end periods are as follows:



|                                |  |             |          |  |             |  |          | 
|------------------------------- |  | ----------- | -------- |  | ----------- |  | -------- | 
|                                |  | December 31 |          |  | December 31 | 
|                                |  |             | 2012     |  |             |  | 2011     | 
|Minimum lease payments expensed |  |             | $  1,483 |  |             |  | $  3,631 | 

12.     PROVISIONS



In conjunction with the acquisition of Cadiscor Resources
Inc. in 2009, the Company assumed an obligation in the amount of $1.0 million, payable in cash or by the issuance of common shares of the Company, upon achieving a specified production target of 300,000 milled tonnes of ore at its Sleeping Giant
mill. Based on production results, the Company achieved the production target in the last quarter of 2012 with settlement to occur in the first quarter of 2013.

13.     LONG-TERM DEBT



Long-term debt is comprised of the following as at each reporting date:



|                       |  |                |            |  |                |  |           | 
|---------------------- |  | -------------- | ---------- |  | -------------- |  | --------- | 
|                       |  | At December 31 |            |  | At December 31 | 
|                       |  |                | 2012       |  |                |  | 2011      | 
|Senior secured notes   |  |                | $  67,211  |  |                |  | $  65,698 | 
|Convertible debentures |  |                | 34,422     |  |                |  | -         | 
|                       |  |                | $  101,633 |  |                |  | $  65,698 | 

Senior secured notes

During
the fourth quarter of 2011, the Company issued $72.0 million of senior secured notes by way of a private placement for net proceeds of $69.6 million. The notes, which mature on October 4, 2014, with a one year extension at the option of
the Company, were issued in $1,000 denominations and bear interest at a rate of 9.25% per year, payable semi-annually.

In addition to the senior
secured notes, the debt agreement included the debt financing and embedded derivatives relating to the warrants, warrants settlement, and extension options relating to the notes which are available to the Company and the lender. Where applicable,
the embedded derivatives which were not closely related to the debt financings were segregated and grouped for valuation and reporting purposes. Transaction costs were allocated to the debt financing on a pro-rata basis of assigned fair value at the
initial recognition date of October 4, 2011. The net value of the debt is amortized using the effective interest rate method over the remaining term of the debt with interest and accretion charges being recognized through profit and loss in the
period incurred. Interest charges have been capitalized as borrowing costs and included in mining interests (note 8). An effective interest rate of 13% has been applied.



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North American Palladium Ltd.



The embedded derivatives relating to the debt financing are recorded at fair value
through profit or loss at each reporting date. At December 31, 2012 and December 31, 2011, the warrants and related options were valued using a binomial model which included with the following key assumptions:



|                          |  |  |                 |   |  |  |                 |  
|------------------------- |  |  | --------------- | - |  |  | --------------- | -
|                          |  |  | December 312012 |   |  |  | December 312011 |  
|Market price of palladium |  |  | $  699          |   |  |  | $  636          |  
|Strike price              |  |  | $  620          |   |  |  | $  620          |  
|Volatility1               |  |  | 30              | % |  |  | 43              | %
|Risk free rate            |  |  | 1.14            | % |  |  | 0.98            | %
|Expected life (in years)  |  |  | 1.76            |   |  |  | 2.76            |  

1 Expected volatility is
estimated by considering historic average palladium price volatility based on the remaining life of the warrants.

The value of the derivative
liability is $4.0 million at December 31, 2012 ($4.9 million  December 31, 2011).

Convertible Debentures

On July 31, 2012, the Company completed an offering of 43,000 convertible unsecured subordinated debentures of the Company at a price of $1,000 per debenture,
for total gross proceeds of $43.0 million ($40.8 million net proceeds). The debentures mature on September 30, 2017 and bear interest at a rate of 6.15% per year, payable semi-annually. At the option of the holder, the debentures may be
converted into common shares of the Company at any time prior to maturity at a conversion price of $2.90 per common share.

The convertible debentures
are compound financial instruments, consisting of the debt instrument and the equity conversion feature. The debt instrument was valued at amortized cost using the effective interest rate method at a discount rate of 10.5%. The excess of the
proceeds of $43.0 million over the value assigned to the debt instrument was allocated as the fair value of the equity component of the convertible debentures. Transaction costs were netted against the debt instrument and equity component based on
the pro-rata allocation of the fair value of each instrument at initial recognition.

Of the net proceeds of $40.8 million, $33.9 million has been
allocated to long-term debt, and the remaining portion of $6.9 million has been allocated to the equity component of the convertible debentures at the time of issuance.



|14. | RELATED PARTY TRANSACTIONS
|--- | --------------------------



At the respective reporting dates, the Companys
subsidiaries are as follows:



|            |  |                    |  |  |                |   |  |  |                |  
|----------- |  | ------------------ |  |  | -------------- | - |  |  | -------------- | -
|            |  | Ownership interest | 
|            |  | Country of         |  |  | At December 31 |   |  |  | At December 31 |  
|            |  | incorporation      |  |  | 2012           |   |  |  | 2011           |  
|LDI         |  | Canada             |  |  | 100            | % |  |  | 100            | %
|NAP
Quebec1 |  | Canada             |  |  | 100            | % |  |  | 100            | %



|1 | At December 31, 2012, the Company was committed to the plan to sell its gold division assets through the disposal of all of the shares of its
wholly-owned subsidiary NAP Quebec. Refer to note 4.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Transactions with key management personnel

Key management personnel compensation

The Company
provides non-cash benefits to directors and executive officers, and contributes to a defined contribution plan on their behalf in addition to regular salaried amounts. In accordance with the terms of the Corporate Stock Option plan, directors and
executive officers are entitled to receive stock-based compensation on an annual basis through participation in the Companys group registered retirement savings plan and through incentives issued under the Companys corporate stock option
and restricted share unit plans. Refer to note 15.

Summary of key management personnel compensation



|                             |  |             |          |  |             |  |          | 
|---------------------------- |  | ----------- | -------- |  | ----------- |  | -------- | 
|                             |  | December 31 |          |  | December 31 | 
|                             |  |             | 2012     |  |             |  | 2011     | 
|Short-term employee benefits |  |             | $  2,412 |  |             |  | $  2,709 | 
|Post employment benefits     |  |             | 93       |  |             |  | 72       | 
|Share-based payments         |  |             | 377      |  |             |  | 2,339    | 
|                             |  |             | $  2,882 |  |             |  | $  5,120 | 

15.     SHAREHOLDERS EQUITY



(a)     Authorized and Issued
Capital Stock

The authorized capital stock of the Company consists of an unlimited number of common shares.

(b)     Common share purchase warrants

The changes in issued common share purchase warrants for the period end are summarized below:



|                            |  |          |                        |  |        |  |      |          |  |  |            |   |  |  |          |  
|--------------------------- |  | -------- | ---------------------- |  | ------ |  | ---- | -------- |  |  | ---------- | - |  |  | -------- | -
|As at December 31 2012      |  |          | As at December 31 2011 | 
|                            |  | Warrants |                        |  | Amount |  |      | Warrants |  |  | Amount     |  
|Balance beginning of period |  |          | -                      |  |        |  | $  - |          |  |  | 13,837,924 |   |  |  | $  5,113 |  
|Warrants exercised          |  |          | -                      |  |        |  | -    |          |  |  | (5,009,986 | ) |  |  | (1,239   | )
|Warrants expired            |  |          | -                      |  |        |  | -    |          |  |  | (8,827,938 | ) |  |  | (3,874   | )
|Balance, end of period      |  |          | -                      |  |        |  | $  - |          |  |  | -          |   |  |  | $  -     |  

On December 8, 2010 the Company announced the acceleration of the expiry of the Series A warrants to January 14, 2011.
During the first quarter of 2011, $21.3 million of proceeds were received from the exercise of 5,009,986 Series A warrants. Total proceeds of $38.8 million were received from the exercise of Series A warrants and 67,938 Series A warrants were not
exercised prior to expiry.

On April 28, 2010, the Company completed an equity offering of 20,000,000 units at a price of $5.00 per unit for total
net proceeds of $94.2 million (issue costs $5.8 million). Each unit consisted of one share and one-half a Series B warrant. As at December 31, 2010, 1,240,000 Series B warrants were exercised for total proceeds of $8.1 million. On
October 28, 2011, the remaining Series B warrants expired unexercised.



|(c) | Group Registered Retirement Savings Plan
|--- | ----------------------------------------

The Company has a
group registered retirement savings plan, in which eligible employees can participate in at their option. The Company is required to make contributions on a quarterly basis equivalent to 3% of eligible employees base compensation and up to an
additional 2% matching, per employee per annum, made either in cash or treasury shares of the Company. The maximum number of common shares available for grant shall not exceed 10% of the issued and outstanding common shares of the Company, including
the issuance under the Corporate Stock Option Plan and other securities-based compensation plans. If the matching contribution is made in treasury shares, the price per share issued is the 5-day volume weighted average trading price of the common
shares on the Toronto Stock Exchange (TSX) preceding the end of the quarter. During the year ended December 31, 2012, the Company contributed 551,401 shares with a fair value of $1,240 (2011  203,252 shares with a fair value
of $841).



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|(d) | Flow-through share offerings
|--- | ----------------------------

In November 2012, the Company
issued 2,425,000 flow-through common shares at a price of $1.65 per share for net proceeds of $3.6 million. The Company is required to spend the gross proceeds of $4.0 million on eligible exploration and mine development expenditures, which
expenditures are expected to be renounced to investors for the 2012 tax year. As at December 31, 2012, $1.9 million was spent, with the remaining $2.1 million expected to be spent by March 31, 2013.

On April 30, 2012, the Company issued 11,300,000 flow-through common shares at a price of $3.10 per share for net proceeds of $32.8 million. The Company is
required to spend the gross proceeds of $35.0 million on eligible exploration and mine development expenditures, which expenditures are expected to be renounced to investors for the 2012 tax year. As at December 31, 2012, $35.0 million was
spent.

On February 18, 2011, the Company completed a flow-through share offering of 2,667,000 flow-through common shares. The Company was required
to spend gross proceeds of $22.0 million on Canadian exploration expenses prior to December 31, 2012, which was fulfilled by December 31, 2011.



|(e) | Corporate Stock Option Plan
|--- | ---------------------------

The Company has a Corporate
Stock Option Plan (the Plan), under which eligible directors, officers, employees and consultants of the Company may receive options to acquire common shares. The Plan is administered by the Board of Directors, which will determine after
considering recommendations made by the Compensation Committee, the number of options to be issued, the exercise price (which is the 5-day volume weighted average trading price of the common shares on the TSX on the trading day prior to the grant
date), 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 the time period should the optionee cease to be an
Eligible Person as set forth in the conditions of the Plan. One third of options granted vest on each of the first three anniversary dates of the date of grant.

The maximum number of common shares available for grant shall not exceed 10% of the issued and outstanding common shares of the Company, including the issuance under the Group Retirement Savings Plan and other
securities-based compensation plans. As at December 31, 2012, 5,291,051 options (December 31, 2011  5,853,717 options) were available to be granted under the Plan.

The following summary sets out the activity in outstanding common share purchase options:



|                                     |  |                   |           |   |                                 |  |         |         |  |  |                                 |   |  |  |         | 
|------------------------------------ |  | ----------------- | --------- | - | ------------------------------- |  | ------- | ------- |  |  | ------------------------------- | - |  |  | ------- | 
|                                     |  | December 31, 2012 |           |   | December 31, 2011               | 
|                                     |  | Options           |           |   | Weighted
Average Exercise
Price |  |         | Options |  |  | Weighted
Average Exercise Price |  
|Outstanding, beginning of period     |  |                   | 3,644,583 |   |                                 |  | $  4.43 |         |  |  | 3,847,833                       |   |  |  | $  4.22 | 
|Granted                              |  |                   | 1,772,000 |   |                                 |  | $  2.82 |         |  |  | 273,000                         |   |  |  | $  5.45 | 
|Exercised                            |  |                   | -         |   |                                 |  | -       |         |  |  | (317,919                        | ) |  |  | $  2.13 | 
|Cancelled                            |  |                   | (720,000  | ) |                                 |  | $  4.34 |         |  |  | (158,331                        | ) |  |  | $  5.73 | 
|Expired                              |  |                   | (489,334  | ) |                                 |  | $  5.14 |         |  |  | -                               |   |  |  | -       | 
|Outstanding, end of period           |  |                   | 4,207,249 |   |                                 |  | $  3.68 |         |  |  | 3,644,583                       |   |  |  | $  4.43 | 
|Options exercisable at end of period |  |                   | 2,335,591 |   |                                 |  | $  3.88 |         |  |  | 2,439,925                       |   |  |  | $  4.06 | 

No options were exercised during the year ended December 31, 2012. For the year ended December 31, 2011, the weighted
average share price on the dates common share purchase options were exercised was $3.57.



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The following table summarizes information about the Companys stock options
outstanding at December 31, 2012:



|                     |  |                                           |      |  |                                         |  |           |                                         |  |  |           | 
|-------------------- |  | ----------------------------------------- | ---- |  | --------------------------------------- |  | --------- | --------------------------------------- |  |  | --------- | 
|Exercise price range |  | Average remainingcontractual life (years) |      |  | Options Outstanding atDecember 31, 2012 |  |           | Options Exercisable atDecember 31, 2012 | 
|$1.65-2.50           |  |                                           | 3.65 |  |                                         |  | 789,750   |                                         |  |  | 774,750   | 
|$2.51-3.00           |  |                                           | 4.11 |  |                                         |  | 1,665,000 |                                         |  |  | 200,000   | 
|$3.01-6.00           |  |                                           | 4.79 |  |                                         |  | 694,999   |                                         |  |  | 621,668   | 
|$6.01-8.87           |  |                                           | 4.02 |  |                                         |  | 1,057,500 |                                         |  |  | 739,173   | 
|                     |  |                                           | 4.11 |  |                                         |  | 4,207,249 |                                         |  |  | 2,335,591 | 

The fair value of options granted during the year ended December 31, 2012 and the year ended December 31, 2011 have been
estimated at the date of grant using the Black Scholes option pricing model with the following weighted average assumptions:



|                                      |  |                  |           |   |                  |  |         |  
|------------------------------------- |  | ---------------- | --------- | - | ---------------- |  | ------- | -
|                                      |  | December 31
2012 |           |   | December 31
2011 | 
|Awards granted                        |  |                  | 1,772,000 |   |                  |  | 273,000 |  
|Weighted average fair value of awards |  |                  | $  1.24   |   |                  |  | $  2.91 |  
|Pre-vest forfeiture rate              |  |                  | 13        | % |                  |  | 14      | %
|Grant price                           |  |                  | $  2.82   |   |                  |  | $  5.45 |  
|Market price                          |  |                  | $  2.53   |   |                  |  | $  5.53 |  
|Volatility1                           |  |                  | 65        | % |                  |  | 65      | %
|Risk free rate                        |  |                  | 1.25      | % |                  |  | 2.04    | %
|Dividend yield                        |  |                  | 0         | % |                  |  | 0       | %
|Expected life (in years)              |  |                  | 4.4       |   |                  |  | 4.3     |  



|1 | Expected volatility is estimated by considering historic average share price
volatility based on the average expected life of the options.
|- | ------------------------------------------------------------------------------------------------------------------------------------------



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



|                                                      |  |                  |             |  |                  |  |             | 
|----------------------------------------------------- |  | ---------------- | ----------- |  | ---------------- |  | ----------- | 
|                                                      |  | December 31
2012 |             |  | December 31
2011 | 
|Net loss available to common shareholders             |  |                  | $  66,037   |  |                  |  | $  65,154   | 
|Effect of dilutive securities                         |  |                  | 1,017       |  |                  |  | -           | 
|Adjusted net loss available to common shareholders    |  |                  | $  67,054   |  |                  |  | $  65,154   | 
|Weighted average number of shares outstanding         |  |                  | 170,960,774 |  |                  |  | 162,011,253 | 
|Effect of dilutive securities                         |  |                  | 23,000      |  |                  |  | -           | 
|Weighted average diluted number of shares outstanding |  |                  | 170,983,774 |  |                  |  | 162,011,253 | 
|Diluted net loss per share                            |  |                  | $  0.39     |  |                  |  | $  0.40     | 



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On July 31, 2012, the Company completed an offering of convertible debentures. The
calculation of the weighted average number of shares outstanding and the net profit or net loss to common shareholders will be impacted in future periods upon the assumed conversion of the convertible debentures. Refer to note 13.

For the year ended December 31, 2012, the effect of dilutive securities relates to the potential conversion of outstanding palladium warrants. The
dilutive effects of the convertible debentures and stock options have not been included in the determination of diluted loss per share because to do so would be anti-dilutive. For the year ended December 31, 2011, the effect of outstanding
palladium warrants and stock options has not been included in the determination of diluted loss per share because to do so would be anti-dilutive.



|(g) | Other Stock-Based Compensation  Restricted Share Unit Plan
|--- | -----------------------------------------------------------

The Company has a Restricted Share Unit Plan (RSU) under which eligible directors, officers and key employees of the Company are entitled to receive awards of restricted share units. Each restricted
share unit is equivalent in value to the fair market value of a common share of the Company on the date of the award and a corresponding liability is established on the balance sheet. The RSU 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. The value of each award is charged to compensation
expense over the period of vesting. At each reporting date, the compensation expense and liability are adjusted to reflect the changes in market value of the liability based on the fair values of RSUs for each vesting period determined
using the Black-Scholes model.

As at December 31, 2012, 237,871 (December 31, 2011  129,418) restricted share units had been granted and were
outstanding at an aggregate value of $253 (December 31, 2011  $237).



|(h) | Summary of Share-based compensation and employee benefits
|--- | ---------------------------------------------------------

The following table details the components of share-based compensation expense relating to continuing operations:



|                                   |  |                              |          |  |                              |  |          | 
|---------------------------------- |  | ---------------------------- | -------- |  | ---------------------------- |  | -------- | 
|                                   |  | Year ended
December 31, 2012 |          |  | Year ended
December 31, 2011 | 
|Registered retirement savings plan |  |                              | $  1,073 |  |                              |  | $  634   | 
|Common share stock options         |  |                              | 1,204    |  |                              |  | 2,452    | 
|Restricted share units             |  |                              | 82       |  |                              |  | 135      | 
|                                   |  |                              | $  2,359 |  |                              |  | $  3,221 | 

16.     FINANCIAL INSTRUMENTS



The Company has exposure to the following risks from its
use of financial instruments: credit risk, market risk, currency risk, interest rate risk, commodity price risk and liquidity risk.

Credit Risk

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual
obligations. The Companys exposure arises principally from its short term interest bearing deposits and accounts receivable. Historically, the Company has not experienced any losses related to individual customers. The Company invests its cash
and cash equivalents primarily with a major Canadian bank.



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The carrying amount of financial assets represents the maximum credit exposure. The
maximum exposure to credit risk at the reporting date was:



|                          |  |                    |           |  |                    |  |            | 
|------------------------- |  | ------------------ | --------- |  | ------------------ |  | ---------- | 
|                          |  | At December 312012 |           |  | At December 312011 | 
|Cash and cash equivalents |  |                    | $  20,168 |  |                    |  | $  50,935  | 
|Accounts receivable       |  |                    | 53,922    |  |                    |  | 73,048     | 
|Other assets              |  |                    | 7,073     |  |                    |  | 10,560     | 
|                          |  |                    | $  81,163 |  |                    |  | $  134,543 | 

Market Risk

Market
risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk is comprised of currency, interest rate, and commodity price risks. In addition, the Company is
exposed to market risk relating to fluctuations in the share price of the Companys common shares as a result of the RSU plan, which is marked-to-market using the Black-Scholes model at each period end.



|(i) | Currency risk
|--- | -------------

Currency risk is the risk that the fair value
or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. Currency risk is related to the portion of the Companys business transactions denominated in currencies other than Canadian dollars.
The Company is exposed to fluctuations in exchange rates due to certain of its foreign based suppliers and revenues being in foreign currencies. The Companys primary exposure is based upon the movements of the US dollar against the Canadian
dollar. The Companys foreign exchange risk management includes, from time to time, the use of foreign currency forward contracts to fix exchange rates on certain foreign currency exposures.

For the Companys foreign exchange transactions, fluctuations in the respective exchange rates relative to the Canadian dollar will create volatility in the
Companys cash flows and the reported amounts for revenue, operating costs, and exploration costs on a year-to-year basis. Additional earnings volatility arises from the translation of monetary assets and liabilities denominated in currencies
other than Canadian dollars at the rates of exchange at each balance sheet date, the impact of which is reported as a separate component of revenue or foreign exchange gain or loss in the consolidated statements of operations and comprehensive loss.

The Company is exposed to the following currency risk on cash, purchases and borrowings at December 31, 2012.



|                                         |  |     |        |  
|---------------------------------------- |  | --- | ------ | -
|                                         |  | US$ |       
|Cash                                     |  |     | $  327 |  
|Accounts payable and accrued liabilities |  |     | (199   | )
|                                         |  |     | $  128 |  

A 1% strengthening or weakening of the Canadian dollar against the US dollar, assuming that all other variables remained the same,
would have resulted in a nominal decrease or increase, respectively, in the Companys statement of loss and comprehensive loss for the year ended December 31, 2012.

The Companys revenue is affected by currency exchange rates, such that a weakening in the Canadian dollar relative to the US dollar will result in additional revenues and a strengthening in the Canadian
dollar will result in reduced revenues.



|(ii) | Interest rate risk
|---- | ------------------

Interest rate risk is the risk that the
fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company does not enter into derivative financial instruments for speculative purposes. The Company does not hold any specific
hedging instruments, nor does it hold any short term investments that would be significantly impacted from fluctuations in interest rates. Any interest rate fluctuations realized are expected to be offset by favourable changes in the interest on
debt instruments.



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North American Palladium Ltd.



Management does not believe that the net impact of interest rate fluctuations on the
current level of borrowings and short term investments will be significant and, therefore, has not provided a sensitivity analysis of this impact on net earnings.



|(iii) | Commodity price risk
|----- | --------------------

Commodity price risk is the risk that
the fair value or future cash flows of a financial instrument will fluctuate because of changes in commodity prices. The Company is particularly exposed to fluctuations in commodity prices from its sale of metals. From time to time the Company may
enter into forward commodity sales contracts to hedge the effect on revenues of changes in the price of metals it produces. Gains and losses on derivative financial instruments used to mitigate metal price risk are recognized in revenue from metal
sales over the term of the hedging contract.

The Company enters into financial contracts to mitigate the smelter agreements provisional pricing
exposure to rising or declining palladium prices and an appreciating Canadian dollar for past production already sold. The total of these financial contracts represent 55,000 ounces as at December 31, 2012 (69,500 ounces as at December 31,
2011). These contracts mature from January 2013 to May 2013 (2011  January 2012 through June 2012) at an average forward price of $640 per ounce (or $US644 per ounce) (2011  $697 per ounce (or $US699 per ounce)). For substantially all of
the palladium delivered to the customers under the smelter agreements, the quantities and timing of settlement specified in the financial contracts matches final pricing settlement periods. The palladium financial contracts are being recognized on a
mark-to-market basis as an adjustment to revenue. The fair value of these contracts at December 31, 2012 was a liability of $3.2 million included in accounts payable and accrued liabilities (December 31, 2011  $2.0 million asset included
in accounts receivable).

During 2011, the Company issued $72.0 million of senior secured notes by way of a private placement for net proceeds of $69.6
million. The Company also issued one warrant with each $1,000 note. Each warrant entitles the holder to purchase 0.35 ounces of palladium at a purchase price of US$620 (the Strike Price) per ounce, anytime up to October 4,
2014. If the warrants are exercised, settlement will occur in cash with the Company paying each warrant held by the note holder the difference between the average of the U.S dollar palladium afternoon fixing price per ounce on the London
Platinum and Palladium Market for the ten trading days prior to the exercise date less the Strike Price, multiplied by 0.35. Alternatively, the Company has the option to settle the amount owing to the warrant holder at a 7% discount to 5-day
weighted average market price of the common shares of the Company at the date of exercise. At December 31, 2012, the value of the warrants was $4.0 million, including a loss recognized in the Companys consolidated statement of loss
and comprehensive loss of $0.9 million.

As at December 31, 2012, the Companys exposure to commodity price is limited to accounts receivable
associated with provisional pricing of metal concentrate sales particularly palladium, and to palladium warrants. A 1% strengthening or weakening of the palladium price would have resulted in an approximate $0.2 million decrease or increase,
respectively, in the Companys loss and comprehensive loss for the year ended December 31, 2012.

Liquidity Risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Companys approach to managing liquidity
risk is to monitor the timing of sales and receivables, to ensure sufficient cash flows are generated from operations to meet the current debt requirements. Where insufficient liquidity may exist, the Company may pursue various debt and equity
instruments for short or long term financing of its operations.

Anticipated operating cash flows and net proceeds on disposal of the gold division are
not expected to provide sufficient cash to fund capital expenditures anticipated for 2013, therefore the Company plans to access the capital markets. In the event access to the capital markets is unavailable, the Company will review its options
to preserve cash resources.



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The table below analyzes the Companys financial liabilities which will be settled
into relevant maturity groupings based on the remaining balances at December 31, 2012 to the contractual maturity date.



|                                         |  |       |           |  |                    |  |           |                           |  |  |                  |  |  |  |      | 
|---------------------------------------- |  | ----- | --------- |  | ------------------ |  | --------- | ------------------------- |  |  | ---------------- |  |  |  | ---- | 
|                                         |  | Total |           |  | In less than1 year |  |           | Between 1 yearand 5 years |  |  | More than5 years | 
|Accounts payable and accrued liabilities |  |       | $  58,474 |  |                    |  | $  58,474 |                           |  |  | $  -             |  |  |  | $  - | 
|Obligations under finance leases         |  |       | 13,673    |  |                    |  | 3,717     |                           |  |  | 9,956            |  |  |  | -    | 
|Current derivative liability             |  |       | 3,952     |  |                    |  | -         |                           |  |  | 3,952            |  |  |  | -    | 
|Long-term debt                           |  |       | 101,633   |  |                    |  | -         |                           |  |  | 101,633          |  |  |  | -    | 

The Company also has asset retirement obligations in the amount of $21.3 million that would become payable at the time of the
closures of its LDI mine and its discontinued operations and assets held for sale (refer to Note 4). As the Company issued letters of credit of $15.9 million related to these obligations, $5.4 million of additional funding is required prior to or
upon closure of these properties. Refer to note 9 for additional disclosure regarding these amounts. The majority of the asset retirement costs are expected to be incurred within one year of mine closure and an application must be made to receive
funds on deposit.

Management monitors consolidated cash flow, in detail, on a daily basis, monthly through month-end reporting, quarterly through
forecasting and yearly through the budget process. Based on the financial liabilities due and noted above, the Company expects to have sufficient operating cash flow exceeding the amounts due.

Fair Values

The Companys financial assets and liabilities consist of cash and cash equivalents,
accounts receivable, sales taxes receivable (included in other assets), reclamation deposits, accounts payable and accrued liabilities, current derivative liabilities, obligations under finance leases and long-term debt.

Cash and cash equivalents are stated at fair value. The carrying value of other assets, and trade accounts payable and accrued liabilities approximate their fair
values due to the immediate or short-term maturity of these financial instruments.

The fair value of the obligations under finance 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 RSUs are determined as described in note 15(g).

Derivatives

The fair value of forward exchange
contracts is based on their listed market price, if available. If a listed market price is not available, then fair value is estimated by discounting the difference between the contractual forward price and the current forward price for the residual
maturity of the contract using a risk-free interest rate.

Fair values reflect the credit risk of the instrument and include adjustments to take into
account the credit risk of the Company entity and counterparty when appropriate.

The Company enters into financial contracts to mitigate the smelter
agreements provisional pricing exposure to rising or declining palladium prices and an appreciating Canadian dollar for past production already sold. For substantially all of the palladium delivered to the customer under the smelter agreement,
the quantities and timing of settlement specified in the financial contracts matches final pricing settlement periods. The palladium financial contracts are being recognized on a mark-to-market basis as an adjustment to revenue.

The fair value of the derivative liability relating to the 2011 long term debt issuance primarily relates to the value of palladium warrants and related conversion
options. These derivative instruments are valued using a binomial model.



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Non-derivative financial liabilities

Fair value, which is determined for disclosure purposes, is calculated based on the present value of future principal and interest cash flows, discounted at the
market rate of interest at the reporting date. For finance leases the market rate of interest is determined by reference to similar lease agreements.

The fair values of the non-derivative financial liabilities as of December 31, 2012 are senior secured notes ($68.4 million), convertible debentures ($43.0
million) and finance leases ($10.0 million).

Fair Value Hierarchy

The table below details the assets and liabilities measured at fair value at December 31, 2012:



|                                             |  |                                                             |           |  |                                            |  |           |                                         |  |  |                     |  |  |  |           |  
|-------------------------------------------- |  | ----------------------------------------------------------- | --------- |  | ------------------------------------------ |  | --------- | --------------------------------------- |  |  | ------------------- |  |  |  | --------- | -
|                                             |  | Quoted Prices inActive Marketsfor IdenticalAssets (Level 1) |           |  | SignificantOtherObservableInputs (Level 2) |  |           | SignificantUnobservableInputs (Level 3) |  |  | AggregateFair Value | 
|Financial assets                             |  |                                                             |           |  |                                            |  |           |                                         |  |  |                     |  |  |  |           |  
|Cash and cash equivalents                    |  |                                                             | $  20,168 |  |                                            |  | $  -      |                                         |  |  | $  -                |  |  |  | $  20,168 |  
|Accounts receivable (note 5)                 |  |                                                             | -         |  |                                            |  | 53,922    |                                         |  |  | -                   |  |  |  | 53,922    |  
|Financial liabilities                        |  |                                                             |           |  |                                            |  |           |                                         |  |  |                     |  |  |  |           |  
|RSU liabilities* (note 15(g))                |  |                                                             | -         |  |                                            |  | (253      | )                                       |  |  | -                   |  |  |  | (253      | )
|Fair value of financial contracts* (note 10) |  |                                                             | -         |  |                                            |  | (3,236    | )                                       |  |  | -                   |  |  |  | (3,236    | )
|Fair value of current derivative liability   |  |                                                             | -         |  |                                            |  | (3,952    | )                                       |  |  | -                   |  |  |  | (3,952    | )
|Net carrying value                           |  |                                                             | $  20,168 |  |                                            |  | $  46,481 |                                         |  |  | $  -                |  |  |  | $  66,649 |  



|* | As detailed in notes 5 and 10, the asset or liability relating to the mark-to-market on financial contracts is included in the carrying value of accounts receivable or
accounts payable and accrued liabilities on the balance sheet respectively. RSU liabilities are measured at fair value based on the Black-Scholes valuation model at each reporting date and are included in the balance of accounts payable and accrued
liabilities.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

17.     CAPITAL DISCLOSURE



The Companys objective is to maintain a strong
capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business.

Management defines capital as
the Companys total shareholders equity and any outstanding debt. The board of directors does not establish quantitative return on capital criteria for management but rather promotes year over year sustainable profitable growth.

In order to maintain or adjust the capital structure, the Company may issue new shares, issue new debt or replace existing debt with different
characteristics.

There were no changes in the Companys approach to capital management during the year. The Company is subject to certain minimum
capital requirements in its debt covenants which it fulfilled as of December 31, 2012.



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18.     COMMITMENTS





|(a) | Sheridan Platinum Group of Companies (SPG) Commitment
|--- | -------------------------------------------------------

The Company is required to pay a 5% net smelter royalty to SPG from mining operations at the Lac des Iles mine. This obligation is recorded as royalty expense.



|(b) | Operating Leases and Other Purchase Obligations
|--- | -----------------------------------------------

As at
December 31, 2012, the Company had outstanding operating lease commitments and other purchase obligations of $6.7 million and $84.9 million, respectively (December 31, 2011  $6.9 million and $110.6 million, respectively) all of which had
maturities of less than five years, with the exception of nil operating leases with a maturity greater than five years (December 31, 2011  $193).



|(c) | Letters of Credit
|--- | -----------------

As at December 31, 2012, the Company
had outstanding letters of credit of $17.3 million, consisting of $16.3 million for various mine closure deposits and $1.0 million for a regulated energy supplier (December 31, 2011  $12.1 million outstanding letter of credit, consisting of
$10.6 million for various mine closure deposits and $1.5 million for a regulated energy supplier).



|(d) | Flow-Through Shares
|--- | -------------------

As at December 31, 2012, the
Company had outstanding commitments to spend $2.1 million on eligible exploration expenditures, which the Company expects to spend by March 31, 2013.

19.     REVENUE FROM METAL SALES





|                                      |  |       |            |   |           |  |            |          |  |  |           |   |  |        |           |   |        |  |           |             |  |  |          |   |  |  |        |  
|------------------------------------- |  | ----- | ---------- | - | --------- |  | ---------- | -------- |  |  | --------- | - |  | ------ | --------- | - | ------ |  | --------- | ----------- |  |  | -------- | - |  |  | ------ | -
|                                      |  | Total |            |   | Palladium |  |            | Platinum |  |  | Gold      |   |  | Nickel |           |   | Copper |  |           | OtherMetals | 
|2012                                  |  |       |            |   |           |  |            |          |  |  |           |   |  |        |           |   |        |  |           |             |  |  |          |   |  |  |        |  
|Year ended December 31                |  |       |            |   |           |  |            |          |  |  |           |   |  |        |           |   |        |  |           |             |  |  |          |   |  |  |        |  
|Revenue  before pricing
adjustments1 |  |       | $  161,286 |   |           |  | $  105,161 |          |  |  | $  17,277 |   |  |        | $  18,392 |   |        |  | $  10,744 |             |  |  | $  9,310 |   |  |  | $  402 |  
|Pricing adjustments:                  |  |       |            |   |           |  |            |          |  |  |           |   |  |        |           |   |        |  |           |             |  |  |          |   |  |  |        |  
|Commodities                           |  |       | (305       | ) |           |  | (693       | )        |  |  | 739       |   |  |        | (3        | ) |        |  | (374      | )           |  |  | 25       |   |  |  | 1      |  
|Foreign exchange                      |  |       | (277       | ) |           |  | 33         |          |  |  | (218      | ) |  |        | 178       |   |        |  | (145      | )           |  |  | (119     | ) |  |  | (6     | )
|Revenue  after pricing adjustments   |  |       | $  160,704 |   |           |  | $  104,501 |          |  |  | $  17,798 |   |  |        | $  18,567 |   |        |  | $  10,225 |             |  |  | $  9,216 |   |  |  | $  397 |  
|2011                                  |  |       |            |   |           |  |            |          |  |  |           |   |  |        |           |   |        |  |           |             |  |  |          |   |  |  |        |  
|Year ended December 31                |  |       |            |   |           |  |            |          |  |  |           |   |  |        |           |   |        |  |           |             |  |  |          |   |  |  |        |  
|Revenue  before pricing adjustments1 |  |       | $  148,480 |   |           |  | $  107,035 |          |  |  | $  15,369 |   |  |        | $  11,581 |   |        |  | $  7,914  |             |  |  | $  6,133 |   |  |  | $  448 |  
|Pricing adjustments:                  |  |       |            |   |           |  |            |          |  |  |           |   |  |        |           |   |        |  |           |             |  |  |          |   |  |  |        |  
|Commodities                           |  |       | (5,407     | ) |           |  | (3,229     | )        |  |  | (1,691    | ) |  |        | 223       |   |        |  | (361      | )           |  |  | (326     | ) |  |  | (23    | )
|Foreign exchange                      |  |       | 586        |   |           |  | 198        |          |  |  | 189       |   |  |        | 167       |   |        |  | 32        |             |  |  | (3       | ) |  |  | 3      |  
|Revenue  after pricing adjustments   |  |       | $  143,659 |   |           |  | $  104,004 |          |  |  | $  13,867 |   |  |        | $  11,971 |   |        |  | $  7,585  |             |  |  | $  5,804 |   |  |  | $  428 |  



|1 | Totals for the year ended December 31, 2012 exclude gold and silver revenues amounting to $3,004 (2011  $26,813) relating to the Companys NAP
Quebec subsidiary. Revenues for NAP Quebec have been reported separately as part of discontinued operations. Refer to note 4.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

During 2012, the Company delivered all of its concentrate to three customers under the terms of the respective agreements (2011  two customers).



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Although the Company sells its bulk concentrate to a limited number of customers, it is
not economically dependent upon any one customer as there are other markets throughout the world for the Companys concentrate.

20.
    INTEREST EXPENSE & OTHER COSTS AND OTHER INCOME





|                                                  |  |      |           |   |      |  |           |  
|------------------------------------------------- |  | ---- | --------- | - | ---- |  | --------- | -
|                                                  |  | 2012 |           |   | 2011 | 
|Interest expense & other costs                    |  |      |           |   |      | 
|Interest on finance leases                        |  |      | $  843    |   |      |  | $  157    |  
|Financing costs                                   |  |      | -         |   |      |  | 767       |  
|Asset retirement obligation accretion             |  |      | 262       |   |      |  | 292       |  
|Accretion expense on long-term debt               |  |      | 2,996     |   |      |  | 457       |  
|Interest expense                                  |  |      | 580       |   |      |  | 330       |  
|Unrealized loss on palladium warrants             |  |      | -         |   |      |  | 460       |  
|                                                  |  |      | $  4,681  |   |      |  | $  2,463  |  
|Other income                                      |  |      |           |   |      |  |           |  
|Unrealized gain on palladium warrants             |  |      | $  (924   | ) |      |  | $  -      |  
|Gain on revaluation of debt                       |  |      | (820      | ) |      |  | -         |  
|Gain on renouncement of flow-through expenditures |  |      | (1,625    | ) |      |  | (1,840    | )
|Interest income                                   |  |      | (229      | ) |      |  | (943      | )
|                                                  |  |      | $  (3,598 | ) |      |  | $  (2,783 | )
|                                                  |  |      | $  1,083  |   |      |  | $  (320   | )

21.     CONTINGENCIES



From time to time, the Company is involved in litigation,
investigations, or proceedings related to claims arising in the ordinary course of business. The Company does not believe such matters are material. In 2011, a Statement of Claim was filed with the Ontario Superior Court of Justice against the
Company and two of its officers regarding a potential class action lawsuit. In 2012, a fresh Statement of Claim was filed increasing the amount of the claim to $100.0 million. In December of 2012, the plaintiffs filed a motion of record
for certification and for leave. The Company intends to vigorously defend the potential claim. It is not possible at this time to estimate the outcome of the potential action and accordingly, the Company has not recorded any associated
provisions within its consolidated financial statements at December 31, 2012.

22.     INCOME TAXES



Rate Reconciliation

The provision for income and mining taxes  continuing operations differs from the amount that would have resulted by applying the
combined Canadian Federal and Ontario statutory income tax rates of approximately 26.5%2(2011  28.3%):



|                                                                       |  |                  |           |   |                  |  |          |  
|---------------------------------------------------------------------- |  | ---------------- | --------- | - | ---------------- |  | -------- | -
|                                                                       |  | December 31
2012 |           |   | December 31
2011 | 
|Income tax expense (recovery) using statutory income tax rates         |  |                  | $  (3,022 | ) |                  |  | $  1,759 |  
|Increase (decrease) in taxes resulting from:                           |  |                  |           |   |                  |  |          |  
|Change in unrecognized temporary differences                           |  |                  | 5,223     |   |                  |  | (1,134   | )
|Statutory permanent differences                                        |  |                  | (2,202    | ) |                  |  | (309     | )
|Ontario Harmonization Transitional tax, in respect of the prior period |  |                  | -         |   |                  |  | 2,388    |  
|Expiration of warrants1                                                |  |                  | -         |   |                  |  | (555     | )
|Difference in statutory tax rates                                      |  |                  | 1         |   |                  |  | (316     | )
|Income and mining tax expense  continuing operations                  |  |                  | $  -      |   |                  |  | $  1,833 |  



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|1 | Tax recovery on the expiration of share purchase warrants, whereas the deferred tax liability was charged to Contributed Surplus.
|- | ---------------------------------------------------------------------------------------------------------------------------------

|2 | The statutory tax rate decreased from 2011 to 2012 due to a reduction in Canadian Federal and Ontario rates over the
period.
|- | ----------------------------------------------------------------------------------------------------------------------------

Components of Income tax expense

The details of the Companys income and mining tax expense (recovery) are as follows:



|                                       |  |                  |      |  |                  |  |          |  
|-------------------------------------- |  | ---------------- | ---- |  | ---------------- |  | -------- | -
|                                       |  | December 31
2012 |      |  | December 31
2011 | 
|Current income tax expense (recovery): |  |                  |      |  |                  |  |          |  
|Income taxes                           |  |                  |      |  |                  |  |          |  
|Adjustments for prior period1          |  |                  | $  - |  |                  |  | $  2,388 |  
|Deferred income tax recovery:          |  |                  |      |  |                  |  |          |  
|Income taxes                           |  |                  | -    |  |                  |  | (555     | )
|Total                                  |  |                  | $  - |  |                  |  | $  1,833 |  



|1 | Impact of a proposed CRA reassessment received in 2011 related to the Companys Ontario harmonization tax liability.
|- | --------------------------------------------------------------------------------------------------------------------

Deferred tax liabilities

The following table summarizes the components of deferred income and mining tax:



|                                |  |                  |      |  |                  |  |           |  
|------------------------------- |  | ---------------- | ---- |  | ---------------- |  | --------- | -
|                                |  | December 31
2012 |      |  | December 31
2011 | 
|Deferred mining tax liabilities |  |                  |      |  |                  |  |           |  
|Gold mining interests           |  |                  | $  - |  |                  |  | $  (4,264 | )
|Deferred tax liabilities, net   |  |                  | $  - |  |                  |  | $  (4,264 | )

The following table summarizes the movement in deferred tax liabilities:



|                                     |  |      |           |   |      |  |           |  
|------------------------------------ |  | ---- | --------- | - | ---- |  | --------- | -
|                                     |  | 2012 |           |   | 2011 | 
|Balance at the beginning of the year |  |      | $  (4,264 | ) |      |  | $  (1,207 | )
|Discontinued operations              |  |      | 4,264     |   |      |  | (3,057    | )
|Balance at the end of the year       |  |      | $  -      |   |      |  | $  (4,264 | )

Unrecognized deferred tax assets

Deferred income and mining tax assets from continuing operations have not been recognized in respect of the following items:



|                                               |  |                  |           |  |                  |  |           | 
|---------------------------------------------- |  | ---------------- | --------- |  | ---------------- |  | --------- | 
|                                               |  | December 31
2012 |           |  | December 31
2011 | 
|Loss carryforwards                             |  |                  | $  75,713 |  |                  |  | $  89,862 | 
|Deductible temporary differences, income taxes |  |                  | $  20,382 |  |                  |  | $  33,599 | 
|Deductible temporary differences, mining taxes |  |                  | $  2,559  |  |                  |  | $  9,183  | 

The tax losses not recognized expire as per the amount and years noted below. The deductible temporary differences do not expire
under current tax legislation. Deferred tax assets have not been recognized in respect of these items because it is not probable that future taxable profit will be available against which the Company can utilize the benefits there from.



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Income tax attributes

As at December 31, 2012, the Company had the following approximate income tax attributes from continuing operations to carry forward:



|                                     |  |        |            |  |             |  |             | 
|------------------------------------ |  | ------ | ---------- |  | ----------- |  | ----------- | 
|                                     |  | Amount |            |  | Expiry Date | 
|Non-capital losses                   |  |        | $  293,889 |  |             |  | 2015 - 2032 | 
|Capital losses                       |  |        | $  7,260   |  |             |  | Indefinite  | 
|Undepreciated capital cost allowance |  |        | $  119,106 |  |             |  | Indefinite  | 
|Tax basis of mineral interests       |  |        | $  265,501 |  |             |  | Indefinite  | 

23.     OTHER DISCLOSURES



Statement of Cash flows

The net changes in non-cash working capital balances related to operations are as follows:



|                                         |  |      |           |   |      |  |           |  
|---------------------------------------- |  | ---- | --------- | - | ---- |  | --------- | -
|                                         |  | 2012 |           |   | 2011 | 
|Cash provided by (used in):              |  |      |           |   |      |  |           |  
|Accounts receivable                      |  |      | $  22,362 |   |      |  | $  7,635  |  
|Inventories                              |  |      | (2,427    | ) |      |  | 7,326     |  
|Other assets                             |  |      | (1,802    | ) |      |  | (1,488    | )
|Accounts payable and accrued liabilities |  |      | 22,403    |   |      |  | 2         |  
|Other financial liabilities              |  |      | (923      | ) |      |  | -         |  
|Taxes payable                            |  |      | 42        |   |      |  | 2,549     |  
|                                         |  |      | $  39,655 |   |      |  | $  16,024 |  

24.     SEGMENT INFORMATION



The Company is Canadian based and is in the business of
exploring and mining palladium, platinum, gold and certain base metals. Its operations are organized into three reportable segments: palladium operations include the LDI palladium mine and mill; gold operations include the Vezza gold mine and
Sleeping Giant mine and mill; and corporate and other. The palladium and gold operations include activities related to exploration, evaluation and development, mining, and milling. The corporate and other segment includes general corporate expenses
and other projects not allocated to the other segments. The Companys revenue by significant product type is disclosed in Note 19. The Companys segments are summarized in the following table.



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North American Palladium Ltd.



As at and during the years ended December 31, 2012 and December 31, 2011,
segmented information is presented as follows:



|                                         |  |                      |            |   |                      |  |            |                           |  |  |                            |  |  |       |           |  |                     |  |            |                            |  |  |                    |  |  |       |           |  |  |  |           |  |  |  |            | 
|---------------------------------------- |  | -------------------- | ---------- | - | -------------------- |  | ---------- | ------------------------- |  |  | -------------------------- |  |  | ----- | --------- |  | ------------------- |  | ---------- | -------------------------- |  |  | ------------------ |  |  | ----- | --------- |  |  |  | --------- |  |  |  | ---------- | 
|                                         |  | At December 31, 2012 |            |   | At December 31, 2011 | 
|                                         |  | Palladiumoperations  |            |   | Corporateand other   |  |            | ContinuingoperationsTotal |  |  | Discontinuedgoldoperations |  |  | Total |           |  | Palladiumoperations |  |            | Discontinuedgoldoperations |  |  | Corporateand other |  |  | Total |          
|Cash and cash equivalents                |  |                      | $  (180    | ) |                      |  | $  20,348  |                           |  |  | $  20,168                  |  |  |       | $  -      |  |                     |  | $  20,168  |                            |  |  | $  1,456           |  |  |       | $  71     |  |  |  | $  49,408 |  |  |  | $  50,935  | 
|Accounts receivable                      |  |                      | 53,922     |   |                      |  | -          |                           |  |  | 53,922                     |  |  |       | -         |  |                     |  | 53,922     |                            |  |  | 73,048             |  |  |       | -         |  |  |  | -         |  |  |  | 73,048     | 
|Inventories                              |  |                      | 15,388     |   |                      |  | -          |                           |  |  | 15,388                     |  |  |       | -         |  |                     |  | 15,388     |                            |  |  | 12,342             |  |  |       | 7,704     |  |  |  | -         |  |  |  | 20,046     | 
|Other current assets                     |  |                      | 7,595      |   |                      |  | 853        |                           |  |  | 8,448                      |  |  |       | 29,814    |  |                     |  | 38,262     |                            |  |  | 5,558              |  |  |       | 9,033     |  |  |  | 1,266     |  |  |  | 15,857     | 
|Mining interests                         |  |                      | 343,449    |   |                      |  | 43         |                           |  |  | 343,492                    |  |  |       | -         |  |                     |  | 343,492    |                            |  |  | 211,505            |  |  |       | 44,433    |  |  |  | 221       |  |  |  | 256,159    | 
|Total assets                             |  |                      | $  420,174 |   |                      |  | $  21,244  |                           |  |  | $  441,418                 |  |  |       | $  29,814 |  |                     |  | $  471,232 |                            |  |  | $  303,909         |  |  |       | $  61,241 |  |  |  | $  50,895 |  |  |  | $  416,045 | 
|Accounts payable and accrued liabilities |  |                      | $  52,095  |   |                      |  | $  6,379   |                           |  |  | $  58,474                  |  |  |       | $   -     |  |                     |  | $  58,474  |                            |  |  | $  26,849          |  |  |       | $  12,184 |  |  |  | $  3,403  |  |  |  | $  42,436  | 
|Credit Facility                          |  |                      | -          |   |                      |  | 15,089     |                           |  |  | 15,089                     |  |  |       | -         |  |                     |  | 15,089     |                            |  |  | -                  |  |  |       | -         |  |  |  | -         |  |  |  | -          | 
|Obligations under finance leases         |  |                      | 13,673     |   |                      |  | -          |                           |  |  | 13,673                     |  |  |       | -         |  |                     |  | 13,673     |                            |  |  | 4,314              |  |  |       | 218       |  |  |  | -         |  |  |  | 4,532      | 
|Provisions                               |  |                      | -          |   |                      |  | 1,000      |                           |  |  | 1,000                      |  |  |       | -         |  |                     |  | 1,000      |                            |  |  | -                  |  |  |       | 1,000     |  |  |  | -         |  |  |  | 1,000      | 
|Asset retirement obligations             |  |                      | 15,214     |   |                      |  | -          |                           |  |  | 15,214                     |  |  |       | -         |  |                     |  | 15,214     |                            |  |  | 13,905             |  |  |       | 6,976     |  |  |  | -         |  |  |  | 20,881     | 
|Other liabilities                        |  |                      | 3,226      |   |                      |  | 3,952      |                           |  |  | 7,178                      |  |  |       | 12,071    |  |                     |  | 19,249     |                            |  |  | 3,363              |  |  |       | 4,264     |  |  |  | 4,875     |  |  |  | 12,502     | 
|Long-term debt                           |  |                      | -          |   |                      |  | 101,633    |                           |  |  | 101,633                    |  |  |       | -         |  |                     |  | 101,633    |                            |  |  | -                  |  |  |       | -         |  |  |  | 65,698    |  |  |  | 65,698     | 
|Total liabilities                        |  |                      | $  84,208  |   |                      |  | $  128,053 |                           |  |  | $  212,261                 |  |  |       | $  12,071 |  |                     |  | $  224,322 |                            |  |  | $  48,431          |  |  |       | $  24,642 |  |  |  | $  73,976 |  |  |  | $  147,049 | 



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North American Palladium Ltd.





|                                                                 |  |                              |            |   |                              |  |            |                           |  |  |                            |   |  |       |            |   |                     |  |            |                    |  |  |                           |   |  |                            |            |   |       |  |            |   |  |  |            |   |  |  |            |  
|---------------------------------------------------------------- |  | ---------------------------- | ---------- | - | ---------------------------- |  | ---------- | ------------------------- |  |  | -------------------------- | - |  | ----- | ---------- | - | ------------------- |  | ---------- | ------------------ |  |  | ------------------------- | - |  | -------------------------- | ---------- | - | ----- |  | ---------- | - |  |  | ---------- | - |  |  | ---------- | -
|                                                                 |  | Year ended December 31, 2012 |            |   | Year ended December 31, 2011 | 
|                                                                 |  | Palladiumoperations          |            |   | Corporateand other           |  |            | ContinuingoperationsTotal |  |  | Discontinuedgoldoperations |   |  | Total |            |   | Palladiumoperations |  |            | Corporateand other |  |  | ContinuingoperationsTotal |   |  | Discontinuedgoldoperations |            |   | Total | 
|Revenue  after pricing adjustments                              |  |                              | $  160,704 |   |                              |  | $   -      |                           |  |  | $  160,704                 |   |  |       | $  3,004   |   |                     |  | $  163,708 |                    |  |  | $  143,659                |   |  |                            | $   -      |   |       |  | $  143,659 |   |  |  | $  26,813  |   |  |  | $  170,472 |  
|Depreciation and amortization                                    |  |                              | 19,528     |   |                              |  | 178        |                           |  |  | 19,706                     |   |  |       | 199        |   |                     |  | 19,905     |                    |  |  | 9,961                     |   |  |                            | 183        |   |       |  | 10,144     |   |  |  | 7,460      |   |  |  | 17,604     |  
|Gold mine impairment charge                                      |  |                              | -          |   |                              |  | -          |                           |  |  | -                          |   |  |       | 56,023     |   |                     |  | 56,023     |                    |  |  | -                         |   |  |                            | -          |   |       |  | -          |   |  |  | 49,210     |   |  |  | 49,210     |  
|Operating expenses                                               |  |                              | 125,307    |   |                              |  | -          |                           |  |  | 125,307                    |   |  |       | 3,197      |   |                     |  | 128,504    |                    |  |  | 105,111                   |   |  |                            | -          |   |       |  | 105,111    |   |  |  | 31,628     |   |  |  | 136,739    |  
|Income (loss) from mining operations                             |  |                              | 15,869     |   |                              |  | (178       | )                         |  |  | 15,691                     |   |  |       | (56,415    | ) |                     |  | (40,724    | )                  |  |  | 28,587                    |   |  |                            | (183       | ) |       |  | 28,404     |   |  |  | (61,485    | ) |  |  | (33,081    | )
|Other expenses                                                   |  |                              |            |   |                              |  |            |                           |  |  |                            |   |  |       |            |   |                     |  |            |                    |  |  |                           |   |  |                            |            |   |       |  |            |   |  |  |            |   |  |  |            |  
|General and administration                                       |  |                              | 448        |   |                              |  | 11,554     |                           |  |  | 12,002                     |   |  |       | 62         |   |                     |  | 12,064     |                    |  |  | 429                       |   |  |                            | 11,772     |   |       |  | 12,201     |   |  |  | 82         |   |  |  | 12,283     |  
|Exploration                                                      |  |                              | 14,408     |   |                              |  | 105        |                           |  |  | 14,513                     |   |  |       | 2,768      |   |                     |  | 17,281     |                    |  |  | 9,834                     |   |  |                            | 105        |   |       |  | 9,939      |   |  |  | 6,728      |   |  |  | 16,667     |  
|Other                                                            |  |                              | 1,137      |   |                              |  | (558       | )                         |  |  | 579                        |   |  |       | 93         |   |                     |  | 672        |                    |  |  | 289                       |   |  |                            | (250       | ) |       |  | 39         |   |  |  | 77         |   |  |  | 116        |  
|Income (loss) before taxes                                       |  |                              | (124       | ) |                              |  | (11,279    | )                         |  |  | (11,403                    | ) |  |       | (59,338    | ) |                     |  | (70,741    | )                  |  |  | 18,035                    |   |  |                            | (11,810    | ) |       |  | 6,225      |   |  |  | (68,372    | ) |  |  | (62,147    | )
|Income and mining tax (expense) recovery                         |  |                              | -          |   |                              |  | -          |                           |  |  | -                          |   |  |       | 4,704      |   |                     |  | 4,704      |                    |  |  | (2,388                    | ) |  |                            | 555        |   |       |  | (1,833     | ) |  |  | (1,174     | ) |  |  | (3,007     | )
|Net income (loss) and comprehensive income (loss) for the period |  |                              | $  (124    | ) |                              |  | $  (11,279 | )                         |  |  | $  (11,403                 | ) |  |       | $  (54,634 | ) |                     |  | $  (66,037 | )                  |  |  | $  15,647                 |   |  |                            | $  (11,255 | ) |       |  | $  4,392   |   |  |  | $  (69,546 | ) |  |  | $  (65,154 | )
|                                                                 |  |                             
|                                                                 |  | Year ended December 31, 2012 |            |   | Year ended December 31, 2011 | 
|                                                                 |  | Palladiumoperations          |            |   | Corporateand other           |  |            | ContinuingoperationsTotal |  |  | Discontinuedgoldoperations |   |  | Total |            |   | Palladiumoperations |  |            | Corporateand other |  |  | ContinuingoperationsTotal |   |  | Discontinuedgoldoperations |            |   | Total | 
|Additions to mining interests                                    |  |                              | $  145,180 |   |                              |  | $  -       |                           |  |  | $  145,180                 |   |  |       | $  26,299  |   |                     |  | $  171,479 |                    |  |  | $  148,309                |   |  |                            | $  -       |   |       |  | $  148,309 |   |  |  | $  37,324  |   |  |  | $  185,633 |  

For additional discussion relating to reliance on customers, refer to accounts receivable in note 5 and revenue from metal sales in
note 19.



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