NA Palladium

Overview

In March 2015, the Corporation became aware of potential violations of covenants under its secured credit agreements and entered into discussions with BCP III NAP L.P. ("Brookfield" - which is affiliated with Brookfield Asset Management) regarding a proposed recapitalization transaction aimed at significantly reducing the Corporation's debt and enhancing the Corporation's liquidity (the "Recapitalization"). Under the Recapitalization, occurring under a CBCA plan of arrangement (the "Arrangement"), debt of approximately $345.1 million will be exchanged for common shares, with further Common Share equity then being raised (also under the Arrangement) under a rights offering.

The Corporation

TSX-listed and formerly NYSE-listed CBCA corporation with 393M Common Shares outstanding. Trading of its Common Shares on the NYSE MKT was suspended in April 2015. Through an Ontario mine held in a CBCA subsidiary, it is one of the world's two primary palladium producers.

Brookfield Existing Loan

The book value of the Brookfield Existing Loan of $309.4 million, consists of the secured term loan of $273.4 million and an interim credit facility of $36.0 million. When originally issued in 2013, interest was payable at 15%, subsequently increased to 19%.

Debentures

Convertible debentures with a book value of $40.1 million.

Plan of Arrangement

• The Corporation will pay all accrued and unpaid interest under the senior secured loan from Brookfield;
• the Brookfield Existing Loan will be fully settled by the issuance by the Corporation to Brookfield of 18,214,401,868 Common Shares (representing 92% of the outstanding Common Shares upon completion of the Arrangement but prior to completion of the Rights Offering (described below));
• Debentureholders will be paid all accrued and unpaid interest on the Debentures;
• the Debentures (representing in aggregate $43,251,000) will be fully settled by the issuance by the Corporation to the Debentureholders of 1,187,895,774 Common Shares (representing 6% of the outstanding Common Shares upon completion of the Arrangement but prior to completion of the Rights Offering);
• outstanding restricted share units ("RSUs"), whether or not vested, will be transferred to the Corporation in exchange for the issue to the holder of the number of Common Shares as were subject to the RSUs
• the Common Shares then outstanding will be consolidated on a 1-for-400 basis (the "Share Consolidation");
• all outstanding options and warrants will be cancelled;
• NAP Newco Inc. ("Newco"), a subsidiary of the Corporation created for the sole purpose of effecting the Arrangement, will transfer all of its property to its sole shareholder and its sole shareholder shall assume all it liabilities and Newco shall then be dissolved;
• on the rights issuance date (10 days after the Effective Date of the Arrangement), each holder of New Common Shares will receive, for each New Common Share held, one (1) right to subscribe for 0.1693 New Common Shares (the "Rights") at a subscription price of $5.97 per New Common Share (the "Rights Offering");
• on the expiry date of the Rights, the Corporation shall issue New Common Shares to each holder of Rights upon the due exercise of the Rights and receipt of payment therefor; and
• Brookfield and a Debentureholder (Polaris Securites Inc.) representing approximately 54% of the aggregate principal amount of Debentures have agreed to subscribe for all New Common Shares not subscribed for in the Rights Offering (the "Backstopped Shares").

Following completion of the Arrangement but prior to the completion of the Rights Offering, existing Shareholders will own 2% of the outstanding Common Shares, and the former Debentureholders and Brookfield will hold 6% and 92%..

More on Rights Offering

The gross proceeds of the Rights Offering will be approximately $50 million. The TSX has conditionally approved their listing. Each Holder of Rights who has initially subscribed for all of the New Common Shares to which it is entitled pursuant to the basic subscription privilege may apply to purchase additional New Common Shares at the price equal to the Subscription Price for each additional New Common Share (collectively, the "Additional New Common Shares") with proration potentially occurring based on the number of respective number of Rights exercised by them under the Basic Subscription Privilege. Rights of Ineligible Holders (i.e., outside Canada and the U.S.) will be sold on their behalf.

Accounting treatment

Share capital of $728.6 million and $54.5 million will be recognized on the issuance of 18,214,401,868 and 1,187,895,774 Common Shares in exchange for the Brookfield Existing Loan and Debentures, respectively, assuming a price of $0.04 per Common Share, and a loss on the respective exchanges of $419.2 million and 7.4 million will be recognized.

Canadian tax consequences

Debenture exchange. The exchange by a Resident Debentureholder of Debentures for Common Shares pursuant to the Arrangement will result in a capital gain (or capital loss) to the Resident Debentureholder.

Consolidation

Will not result in a disposition of the Common Shares.

Rights

No amount will be required to be included in computing the income of a Resident Shareholder as a consequence of acquiring Rights (whose cost will be nil) pursuant to the Arrangement, and no gain or loss will be realized upon the exercise of Rights. New Common Shares acquired by a Resident Shareholder upon the exercise of Rights.

U.S. tax consequences

Debentures exchange. The exchange of Debentures for Common Shares followed by the exchange of Common Shares for New Common Shares and the subsequent distribution of Rights to holders of New Common Shares should be treated as an exchange of Debentures for New Common Shares and Rights. The qualification of the exchange of Debentures for New Common Shares and Rights as a tax-free "recapitalization" depends upon, under applicable case law principles, whether the Debentures constitute "securities." Based on their term to maturity at issuance, this should be the case so that, subject to PFIC rules, the exchange of Debentures for New Common Shares and Rights should qualify as a tax-free recapitalization for U.S. federal income tax purposes.

Common Share exchange

The exchange of Common Shares for New Common Shares and the subsequent distribution of Rights to holders of New Common Shares should be treated as an exchange of Common Shares for New Common Shares and Rights, and, subject to the PFIC rules, should qualify as a tax-free recapitalization for U.S. federal income tax purposes.

Market discounts

To the extent that the exchange of Debentures qualifies as a tax-free recapitalization for U.S. federal income tax purposes, a U.S. Holder should not be required to recognize any accrued but unrecognized market discount upon the exchange of its Debentures for New Common Shares and Rights, although it would be required to recognize any such discount upon a subsequent taxable disposition of its New Common Shares or Rights….

PFIC status

The Corporation believes that it presently qualifies, and expects to continue to qualify in the future, for the active commodities business exclusion, so that it will not be classified as a PFIC for the current and subsequent taxable years.

Tax Risk factors

None disclosed.